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info@reason.org (Reason Foundation)http://www.pjdoland.com/chai/?v=0.1Privatization & Government Reform Newsletter #19 (June/July 2015 edition)http://www.reason.org/news/show/privatization-reform-news-19
<p><strong>In this issue:</strong></p>
<ul type="disc">
<li>PENSIONS: <a href="#a">Paying Down Pension Debt Through Asset Sales, Leases</a></li>
<li>EDUCATION: <a href="#b">Trends in School Choice, Funding Portability</a></li>
<li>TRANSPORTATION: <a href="#c">Truck-Friendly Interstate Tolling</a></li>
<li>RIDESHARING: <a href="#d">California vs. Uber</a></li>
<li>PRIVATIZATION: <a href="#e">Using PPPs for National Park Maintenance</a></li>
<li>WATER: <a href="#f">Australia's Water Reform Lessons for California</a></li>
<li>INNOVATORS IN ACTION: <a href="#g">Tackling Georgia's Infrastructure, Pension Challenges</a></li>
<li><a href="#h">News &amp; Notes</a></li>
<li><a href="#i">Quotable Quotes</a></li>
</ul>
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<p><strong><a name="a"></a>PENSIONS: Paying Down Unfunded Pension Liabilities Through Asset Sales and Leases</strong></p>
<p>From an accounting and legal standpoint, unfunded pension liabilities have not historically been treated in the same manner as general obligation bonds and other types of public debt. As such, there is an urgent need not only to account for them properly but also to fund them in ways that impose the least additional burden on taxpayers. One promising strategy that policymakers are starting to consider is the sale or lease of government assets&mdash;such as land, buildings, infrastructure or enterprises&mdash;and the use of proceeds to pay down existing pension debts and thereby put public pension systems on a healthier financial footing. A new Reason Foundation policy brief considers such an approach as a complement to comprehensive pension reform efforts that seek to reduce future unfunded liabilities by shifting away from traditional defined-benefit pension systems.<br /><span style="font-size: 80%; color: red;">&raquo; <a href="http://reason.org/news/show/assets-unfunded-pension-liabilities">FULL REPORT</a></span></p>
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<p><strong><a name="b"></a>EDUCATION: Reviewing Recent Trends in School Choice, Funding Portability</strong></p>
<p>States have continued to move forward in their efforts for more school choice, according to the newly released Education section of Reason Foundation's <em>Annual Privatization Report 2015</em>. The report reviews developments over the past year in education, with topics that include the expansion of school choice programs, charter schools, education savings accounts, student-based budgeting and school funding portability in the states.<br /> <span style="font-size: 80%; color: red;">&raquo; <a href="http://reason.org/news/show/apr-2015-education">FULL REPORT</a></span><br /> <span style="font-size: 80%; color: red;">&raquo; <a href="http://reason.org/news/show/annual-privatization-report-2015"><em>Annual Privatization Report 2015</em> homepage</a></span></p>
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<p><strong><a name="c"></a>TRANSPORTATION: Truck-Friendly Tolls for 21st Century Interstates</strong></p>
<p>It is clear that the nation's Interstate highways desperately need a new, reliable funding source, and few industries need a healthy Interstate system more than the trucking industry. A new Reason Foundation study details why truckers should embrace the use of tolling to finance the reconstruction and modernization of aging Interstate highways, describes how all-electronic tolling can solve the industry's previous privacy and logistical concerns about toll roads, and proposes a set of rules to ensure that the tolls paid by truckers and motorists are used only to rebuild and widen the newly tolled Interstate corridors. Further, the report outlines federal and state legislation that could eliminate the trucking industry's previous objections to tolling.<br /><span style="font-size: 80%; color: red;">&raquo; <a href="http://reason.org/news/show/truck-friendly-tolls-interstates">FULL REPORT</a></span></p>
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<p><strong><a name="d"></a>RIDESHARING: California's Regulatory Climate Is Crushing Transportation Innovation</strong></p>
<p>Earlier this month, a California Public Utilities Commission judge recommended that ride-booking company Uber be fined $7.3 million and suspended from operating in California because of claims the company has failed to provide documentation about where it is picking up passengers and concerns over whether "services are being provided in a nondiscriminatory manner enabling equal access to all." This comes on the heels of the California Labor Commission's Office recent ruling that an Uber driver was an employee, not a private contractor. Reason Foundation's Baruch Feigenbaum writes in the <em>Orange County Register</em> that California's latest attacks on Uber could have far-reaching repercussions for today's sharing economy and are just the latest examples of how the state's regulatory climate is strangling transportation innovation.<br /><span style="font-size: 80%; color: red;">&raquo; <a href="http://reason.org/news/show/californias-regulatory-climate-is-c">FULL ARTICLE</a></span><br /><span style="font-size: 80%; color: red;">&raquo; <a href="http://reason.org/news/show/let-uber-and-taxis-compete">RELATED: Let Uber and Taxis Compete</a></span></p>
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<p><strong><a name="e"></a>PRIVATIZATION: Using PPPs to Tackle the National Parks' Deferred Maintenance Challenges</strong></p>
<p>The National Park Service (NPS) is facing a massive $11.5 billion maintenance backlog spanning roads, wastewater systems, and buildings within national parks, monuments, and recreation areas. As I write in a new article for the Property and Environment Research Center, the agency should look to states and local governments for inspiration on how to deal with its infrastructure challenges. Over the past several decades, cash-strapped state and local governments have turned to public-private partnerships to tap into private sector capital and expertise and to stretch limited dollars further. With the NPS' centennial fast approaching in 2016, it's time to seriously consider creative partnerships with the private sector to address the backlog and ensure parks are sustainable in their second century&mdash;not marred by chronic deterioration.<br /><span style="font-size: 80%; color: red;">&raquo; <a href="http://www.perc.org/articles/breaking-backlog">FULL ARTICLE</a></span></p>
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<p><strong><a name="f"></a>WATER: Six Water Reforms California Can Take from Australia</strong></p>
<p>As Californians search for solutions to the worst drought in the state's history, they can look to the example of Australia, which has dramatically improved its management of water for agriculture over the past two decades. During a severe drought in the 1990s, Australia reformed its system for allocating water, creating better-defined water rights and a water market, which allows farmers, environmental groups and the government to buy, sell and trade water. Today, the price of water better reflects its scarcity and the cost of delivering water. A new Reason Foundation report finds that California should follow Australia's lead and focus on six primary reforms to improve water rights and to create a robust market.<br /><span style="font-size: 80%; color: red;">&raquo; <a href="http://reason.org/studies/show/australia-california-water-brief">FULL REPORT</a></span></p>
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<p><strong><a name="g"></a>INNOVATORS IN ACTION: Taking on Infrastructure, Pension Challenges in Georgia</strong></p>
<p>The latest installment of Reason Foundation's <em>Innovators in Action</em> monthly interview series&mdash;which profiles innovative policymakers in their own words, highlighting good government efforts delivering real results and value for taxpayers&mdash;focuses on Georgia's recent enactment of Senate Bill 59, sponsored by State Senator Hunter Hill. The bill enables the state and local governments to use public-private partnerships for the private financing and development of "social infrastructure," such as higher education facilities, schools, public health facilities and other public buildings. Sen. Hill also sponsored legislation this past session to transition the state teachers' pension system from a traditional defined-benefit pension plan to a hybrid defined-benefit/defined-contribution plan that would have lowered financial risks to the state and provided a more equitable retirement system for teachers of all experience levels. I recently interviewed Sen. Hill on his social infrastructure PPP legislation, the need to reform the state teachers' pension system, and more.<br /><span style="font-size: 80%; color: red;">&raquo; <a href="http://reason.org/news/show/infrastructure-pensions-georgia">FULL INTERVIEW</a></span></p>
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<p><strong><a name="h"></a>NEWS &amp; NOTES</strong></p>
<p><span style="text-decoration: underline;">Pew Pension Debt Report Finds $968 Billion in Unfunded Liabilities</span>: According to the latest pension debt analysis from the Pew Charitable Trusts, the nation's state-run retirement systems had an aggregate $968 billion in unfunded liabilities in 2013, representing the gap between pension benefits promised to government workers and the funds available to meet those obligations. The aggregate pension debt rose $54 billion from the previous year. The report suggests that even though unfunded liabilities may fall somewhat in the coming years, policymakers should not rely on long-term investment returns to close the gap and should instead enact funding policies aimed at paying down pension debt. The full report is <a href="http://www.pewtrusts.org/~/media/Assets/2015/07/PewStates_StatePensionDebtBrief_Final.pdf">available here</a>.</p>
<p><span style="text-decoration: underline;">S&amp;P Releases State Pension Roundup</span>: Last month, Standard &amp; Poor's released a <a href="https://www.globalcreditportal.com/ratingsdirect/renderArticle.do?articleId=1405789&amp;SctArtId=322548&amp;from=CM&amp;nsl_code=LIME&amp;sourceObjectId=9183713&amp;sourceRevId=1&amp;fee_ind=N&amp;exp_date=20250617-21:28:59">report on the state-level pension situation</a>, citing a state's commitment to funding its pension contributions as a key consideration in determining credit quality. The report cites three key pension-related issues expected to shape the policy debate moving forward, including slowing reform efforts (in part the result of legal challenges to already-enacted reforms), a growing gap between well-funded and poorly funded pension plans, and better pension funding ratios in states committed to fully funding pension contributions on an actuarial basis. Overall, the report suggests that pensions will "remain a significant public policy and funding challenge for many state governments, and, due to demographic trends, a continuing source of expanding liabilities for most."</p>
<p><span style="text-decoration: underline;">New Mercatus Report Ranks States' Fiscal Condition</span>: The Mercatus Center of George Mason University recently released a new report detailing each state's fiscal health relative to the U.S. average, creating an overall ranking on fiscal solvency. This overall ranking is based on performance in five categories: cash solvency, budget solvency, long-run solvency, service-level solvency, and trust fund solvency. Overall, the top five states included Alaska, North Dakota, South Dakota, Nebraska, and Florida. These states have large amounts of cash on hand and few debt obligations in the short-term future, but nonetheless still face major issues financing their pensions and health care benefits systems. The bottom five states included Illinois, New Jersey, Massachusetts, Connecticut, and New York. Unfunded pensions and health care benefits are largely the reason these states have low cash on hand and large debt obligations. The full report is <a href="http://mercatus.org/statefiscalrankings">available here</a>.</p>
<p><span style="text-decoration: underline;">Port Authority Selects Partner for LaGuardia Airport PPP</span>: In late May, the Port Authority of New York &amp; New Jersey announced the selection of a private consortium&mdash;LaGuardia Gateway Partners&mdash;for a $3.6 billion PPP to replace the aging Central Terminal Building with a larger, world-class facility, the first phase of an airport redevelopment plan. LaGuardia Gateway Partners&mdash;a consortium that includes Vantage Airport Group, Skanska, Meridiam, Walsh Construction, HOK and Parsons Brinckerhoff&mdash;will finance over $2 billion of the project's cost and will be responsible for the new terminal's design, construction, operation and maintenance. The Port Authority will now begin negotiations with LaGuardia Gateway Partners to finalize its proposal for developing, constructing and operating the terminal as well as the financial terms of the deal. More information is available <a href="http://www.panynj.gov/press-room/press-item.cfm?headLine_id=2218">here</a> and <a href="http://www.laguardiagatewaypartners.com">here</a>.</p>
<p><span style="text-decoration: underline;">Strong Bidder Response to Ohio State University Energy Management PPP</span>: <em>Columbus Business First</em> <a href="http://www.bizjournals.com/columbus/news/2015/06/25/exclusive-40-companies-interested-in-ohio-states.html">reported late last month</a> that Ohio State University (OSU) has received submissions from 44 companies in response to its February request for qualifications from firms interested in a potential 50-year lease of the university's energy system operations. University officials ultimately deemed 40 of the responding firms as qualified. OSU currently spends $100 million per year on energy and faces at least $250 million in needed energy efficiency projects, prompting the pursuit of a public-private partnership to reduce energy spending and tap private financing for costly efficiency upgrades, which would allow the university to redirect resources toward supporting its core academic mission. The university anticipates issuing a request for information to the qualified bidder pool in the fall to seek general details of how a PPP might be structured, followed by a request for detailed proposals in 2016. More information on the energy management initiative is <a href="https://www.osu.edu/energymanagement/">available here</a>.</p>
<p><span style="text-decoration: underline;">Indiana Amends Private Lottery Management Contract</span>: Last month, the Hoosier Lottery Commission approved an amendment to Indiana's contract with private lottery manager GTECH Indiana to lower the amount of net lottery revenue it will promise to the state in exchange for lowering its management fee, changing the incentive payment structure, and providing the state an upfront payment of $18.25 million. The company has missed its revenue targets twice since taking over lottery operations in 2012, in large part due to a slowdown in Powerball sales that is affecting lotteries nationwide. Rather than cancel the contract, commissioners felt that amendment was a better option, and they remain pleased with the vendor's performance overall, relative to other states, <a href="http://www.journalgazette.net/news/local/indiana/Amended-lottery-vendor-contract-lowers-revenue-targets-to-cut-risk-7160405">according to the <em>Fort Wayne Journal Gazette</em></a>.</p>
<p><span style="text-decoration: underline;">Ohio Plans Second Prison Sale, Other Asset Divestiture</span>: <em>The Columbus Dispatch</em> <a href="http://www.dispatch.com/content/stories/local/2015/07/19/ohio-to-sell-20-facilities-one-for-1.html">reports</a> that Ohio officials plan to sell the North Central Correctional Institution in Marion to a private entity, which would make it the second state prison sold to a private prison operator in recent years; the state sold the Lake Erie Correctional Institution to Corrections Corporation of America in 2011. In addition, the state plans to sell 19 other properties, including a Toledo office tower, a halfway house in Lebanon, and several buildings in Columbus. The sales were authorized in the recently enacted biennial state budget.</p>
<p><span style="text-decoration: underline;">New Nevada Law Allows Privatization for Some Medicaid Services</span>: Last month, Nevada Gov. Brian Sandoval signed into law Senate Bill 514, which allows the state to consider privatizing the delivery of Medicaid services for elderly, blind and disabled persons using a managed care model. The legislation would require a review of the fiscal impact of privatization by a legislative committee before any request could be sent to the federal Centers for Medicare and Medicaid Services, which oversees the Medicaid program. The <em>Las Vegas Review-Journal</em> has reported on the legislation <a href="http://www.reviewjournal.com/news/las-vegas/sandoval-signs-law-the-opens-door-privatizing-some-medicaid-services">here</a> and <a href="http://www.reviewjournal.com/news/nevada-legislature/possible-privatization-medicaid-services-raises-concerns">here</a>.</p>
<p><span style="text-decoration: underline;">Chicago Skyway Concessionaire Seeks to Sell Remaining Lease Interest</span>: The <em>Chicago Sun-Times</em> <a href="http://chicago.suntimes.com/news/7/71/730770/skyway-investors-put-concession-deal-sale%20">reported</a> late last month that the concessionaire operating the Chicago Skyway under a 99-year lease is interested in selling its remaining interest in the lease. The Macquarie and Cintra-led consortium entered the lease in 2005, taking over operations and management of the Skyway in exchange for a $1.8 billion upfront payment.</p>
<p><span style="text-decoration: underline;">Jindal Vetoes Anti-Privatization Legislation</span>: For the third year in a row, legislation sponsored by Louisiana State Rep. Kenny Havard modeled after Massachusetts's Pacheco Law&mdash;widely regarded as the most onerous anti-privatization law in the nation&mdash;passed the legislature but was vetoed by Gov. Bobby Jindal last month. <a href="https://legiscan.com/LA/bill/HB137/2015">House Bill 137</a> was designed to prohibit state agencies from entering into many privatization contracts without prior legislative review and approval&mdash;significantly increasing political risks to potential bidders and politicizing what are traditionally decisions made at the discretion of executive agencies&mdash;as well as subject routine contracting decisions to onerous pre-procurement and contract review processes, including a required analysis assuming the hypothetical costs of public employees continuing to provide the service "in the most cost-efficient manner" (presumably to facilitate required cost comparisons with bids received from private firms). Similar legislation introduced by Havard in 2013 and 2014 also passed the House unanimously but stalled in the Senate Finance Committee.</p>
<p><span style="text-decoration: underline;">Aramark Ends Michigan Prison Food Contract, Extends Ohio Contract</span>: Earlier this month, Michigan reached a mutual agreement with prison food service vendor Aramark to <a href="http://bigstory.ap.org/article/9174f9282ea14bf1b550faf6ba77fbc1/apnewsbreak-michigan-ends-prison-food-contract">end its three-year, $145 million contract over a year early</a> after the two sides failed to agree on amendments to the contract related to food menus and billing. Aramark <a href="http://www.freep.com/story/news/politics/2015/07/18/new-prison-food-vendor-trinity-contract-sweeteners/30353563/">will be replaced by Trinity Services Group</a>, the runner-up in the original procurement, under a contract that is more expensive for the state but still within the 10% cost savings threshold relative to public sector provision as required by state law. Meanwhile, Ohio prison officials announced plans to extend Aramark's three-year prison food service contract through mid-2017 after <a href="http://www.dispatch.com/content/stories/local/2015/06/23/prison-food-union-contract.html">rejecting a counteroffer</a> submitted by the Ohio Civil Service Employees Association union seeking to return the service to government operation. The state's Department of Administrative Services found that the union proposal underestimated food costs and failed to factor in increased employee wages.</p>
<p><span style="text-decoration: underline;">Montgomery County, MD Council Advances Partial Liquor Privatization</span>: Earlier this week, the Montgomery County (Maryland) County Council approved a resolution asking the state's General Assembly and governor to amend state law to allow private businesses to sell wholesale specialty beer and wine products in the County and to allow the County to impose a new wholesale distribution fee to replace revenues lost through newly privatized sales. The resolution was recommended by the council's Ad Hoc Committee on Liquor Control, which since December has been studying alternative models for the distribution and sales of alcoholic beverages in the County, which currently controls the wholesale distribution and sale of nearly all alcohol within its borders. The full resolution and supporting information is <a href="http://montgomerycountymd.granicus.com/MetaViewer.php?view_id=6&amp;event_id=1733&amp;meta_id=86930">available here</a>.</p>
<p><span style="text-decoration: underline;">New Orleans Renews Wastewater Contract</span>: The Sewerage &amp; Water Board of New Orleans (S&amp;WB) has renewed a contract with Veolia to continue managing and operating the city's two wastewater treatment plants. The ten-year, $122 million contract will include support for capital improvements, hurricane recovery, septage receiving and biosolids disposal. The S&amp;WB estimates that the partnership has saved taxpayers more than $35 million so far. "Our relationship has produced a stellar record for clean water quality while saving tens of millions of dollars for ratepayers," S&amp;WB Executive Director Cedric S. Grant <a href="http://www.prnewswire.com/news-releases/sewerage-and-water-board-of-new-orleans-renews-environmental-partnership-with-veolia-increases-participation-levels-by-economically-disadvantaged-companies-300101487.html">said in a press release</a>.</p>
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<p><strong><a name="i"></a>QUOTABLE QUOTES</strong></p>
<p>"When states contribute less to their pension systems than their actuaries recommend -- unless a statutory formula prescribes the contribution -- it is almost always a symptom of underlying fiscal misalignment. When a state skimps on pension contributions to temporarily dodge the issue and free up revenue, it can claim that "technically" it has a balanced budget. By contributing less than what is actuarially recommended, a state can more easily finance current operations, but that adds to its long-term liabilities. In other words, it's a way of funding current operations with long-term debt"<br /> <br />&mdash;Standard &amp; Poor's, "<a href="https://www.globalcreditportal.com/ratingsdirect/renderArticle.do?articleId=1405789&amp;SctArtId=322548&amp;from=CM&amp;nsl_code=LIME&amp;sourceObjectId=9183713&amp;sourceRevId=1&amp;fee_ind=N&amp;exp_date=20250617-21:28:59">U.S. State Pension Roundup: Recent Court Rulings And Reform Slowdowns Make Active Management Essential</a>," June 18, 2015.</p>
<p><br />"The American way would be to treat our road system like a utility, the same way we treat electricity or water. We have the technical capability now, thanks to GPS, to charge at the gas pump for every mile we use rather than the current practice of collecting a per-gallon tax. Because of the high cost of adding capacity anywhere, but especially in urban areas, the per-mile charge would of course be highest when demand is highest, during peak periods, and lowest in the middle of the night. Rather than denying drivers access to the system, demand would be managed through price signals that would let drivers decide how and when it is worth it to use the system.<br /><br />The concept of congestion pricing isn't new, but it has typically been considered for only a few highways within a system or for higher-toll express lanes. In contrast, we can, and do, meter every drop of water and every kilowatt-hour of electricity. It doesn't make sense to put a price on some components of the system and give away the rest for free. "<br /> <br />&mdash;Scott Lazenby, "<a href="http://www.governing.com/gov-institute/voices/col-congested-roads-highway-paying-per-mile.html">Why We Should Pay for the Highway Miles We Use</a>," Governing.com, July 17, 2015.</p>
<p><br />"[L]et's say a public pension fund has a 77% funding ratio, which means that it has assets equal to 77% of liabilities. For greater simplicity, let's say it has assets of $77 and liabilities of $100, and therefore an unfunded liability of $23 (100-77). [Using a 7.5% assumed rate of return], liabilities grow 7.5% per annum. That means liabilities that today equal $100 will in one year equal $107.50. For the unfunded liability not to be larger than $23 at that time, that means assets have to grow from $77 to $84.50 (107.50-84.50 = 23). That means that the pension fund needs to earn 9.7% ($77 times 1.097 = 84.50). Anything less and the unfunded liability will grow."<br /> <br />&mdash;David Crane, cited in Jack Dean, "<a href="http://pensiontsunami.com/blog/?p=198">David Crane explains the ramifications of CalPERS&rsquo; 2.4% return for the past year</a>," PensionTsunami.com, July 16, 2015.</p>
<p><br />"The chemicals detected in e-cigarette flavorings present an extremely low level of risk when compared to the chemicals in tobacco smoke. The difference is essentially between a behavior that results in destruction of the lungs and a behavior that may cause, at the worst, mild respiratory irritation. Let's keep a sense of perspective here. Most of the individuals who are regular users of e-cigarettes are former smokers who have quit or current smokers. In either case, switching to vaping is the most important thing they can do to protect their health, assuming they are unable to quit nicotine use completely, which is probably the case for most vapers (that is why they tried vaping in the first place; had they been able to quit cold turkey, they would have)."<br /> <br />&mdash;Dr. Michael Siegel, "<a href="http://tobaccoanalysis.blogspot.com/2015/07/study-on-potential-toxicity-of-e.html ">Study on Potential Toxicity of E-Cigarette Flavorings Produces Unwarranted Scare</a>," The Rest of the Story blog, July 16, 2015</p>
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<p><em>Special thanks to Reason Foundation intern Brenna Butler for assistance in developing the News Notes for this newsletter</em>.</p>
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<p><strong>Additional Resources:</strong></p>
<ul>
<li><a href="http://reason.org/areas/topic/privatization">Reason Foundation privatization research archive</a></li>
<li><a href="http://reason.org/news/show/annual-privatization-report-2015"><em>Annual Privatization Report 2015</em> homepage</a></li>
<li><a href="http://reason.org/news/show/innovators-in-action-2015"><em>Innovators in Action 2015</em> homepage</a></li>
<li><a href="http://reason.org/newsletters/privgovreform/"><em>Privatization &amp; Government Reform Newsletter</em> archive</a></li>
</ul>
<hr />1014335@http://www.reason.orgFri, 31 Jul 2015 00:00:00 EDTleonard.gilroy@reason.org (Leonard Gilroy)Innovators in Action (July 2015 edition): Taking on Infrastructure, Pension Challenges in Georgiahttp://www.reason.org/blog/show/innovators-georgia-infrastructure-p
<p>The <a href="http://reason.org/news/show/infrastructure-pensions-georgia">latest interview</a> in Reason Foundation's <a href="http://www.reason.org/news/show/innovators-in-action-2015"><em>Innovators in Action 2015</em> series</a> focuses on Georgia's recently enacted Senate Bill 59&mdash;the Partnership for Public Facilities and Infrastructure Act&mdash;which enables the state and local governments to use public-private partnerships (PPPs) for the private financing and development of &ldquo;social infrastructure,&rdquo; such as higher education facilities, schools, public health facilities and other public buildings. The passage of SB 59&mdash;the culmination of over two years of work to advance the concept by the bill&rsquo;s sponsor, State Senator Hunter Hill&mdash;places Georgia among the early leaders in providing a statewide legal framework for social infrastructure PPPs, alongside pioneers like Virginia, Texas and Florida. At the same time, Sen. Hill sponsored legislation to transition the state teachers&rsquo; pension system from a traditional defined-benefit pension plan to a hybrid defined-benefit/defined-contribution plan that would have lowered financial risks to the state and provided a more equitable retirement system for teachers of all experience levels.</p>
<p>I recently interviewed Sen. Hill on his social infrastructure PPP legislation, the need to reform the state teachers&rsquo; pension system, and more.</p>
<p>Here's an excerpt:</p>
<blockquote><strong>Leonard Gilroy, Reason Foundation: During the last two legislative sessions you proposed enabling legislation to allow for public-private partnerships (PPPs) in the development of &ldquo;social infrastructure,&rdquo; meaning a broad array of government buildings. That legislation was ultimately enacted this year. What prompted your interest in social infrastructure PPPs?</strong><br /><br /><strong>Georgia State Senator Hunter Hill:</strong> The issue came to my attention once I got into government as I learned about how constrained our budgets are at the state level and the local level for providing facilities that the public needs. As costs have increased in health care and other human services, infrastructure dollars have really taken a downturn in terms of their prevalence within the budget. It just seemed to me that we should leverage the capital, innovation and expertise of the private sector in delivering government facilities. PPPs help the taxpayer get a better value, and they help the public side get a better understanding of how to deliver projects to meet a public need.<br /><br /><strong>Gilroy: Are there particular needs on the social infrastructure front in Georgia that helped drive this legislation forward?</strong><br /><br /><strong>Hill</strong>: No, it wasn&rsquo;t any one specific need. Rather, it was something I think we need to address now for the future. I think the law gives the appropriate flexibility for state and local governments to be able to address the needs that they may have now or face in the future, but it&rsquo;s also constrained enough that it keeps us fiscally responsible and protects the public from any downsides or bad ideas.</blockquote>
<p>Check out the full interview <a href="http://reason.org/news/show/infrastructure-pensions-georgia">here</a>. Other articles featured in the <em>Innovators in Action 2015</em> series are <a href="http://www.reason.org/news/show/innovators-in-action-2015">available here</a>.</p>1014332@http://www.reason.orgThu, 30 Jul 2015 08:00:00 EDTleonard.gilroy@reason.org (Leonard Gilroy)Taking on Infrastructure, Pension Challenges in Georgiahttp://www.reason.org/news/show/infrastructure-pensions-georgia
Innovators in Action 2015 <p>In May 2015, Georgia Gov. Nathan Deal signed into law Senate Bill 59&mdash;the Partnership for Public Facilities and Infrastructure Act&mdash;which enables the state and local governments to use public-private partnerships (PPPs) for the private financing and development of &ldquo;social infrastructure,&rdquo; such as higher education facilities, schools, public health facilities and other public buildings. The passage of SB 59&mdash;the culmination of over two years of work to advance the concept by the bill&rsquo;s sponsor, State Senator Hunter Hill&mdash;places Georgia among the early leaders in providing a statewide legal framework for social infrastructure PPPs, alongside pioneers like Virginia, Texas and Florida.</p>
<p>At the same time, Sen. Hill sponsored legislation to transition the state teachers&rsquo; pension system from a traditional defined-benefit pension plan to a hybrid defined-benefit/defined-contribution plan that would have lowered financial risks to the state and provided a more equitable retirement system for teachers of all experience levels. Like many pension plans covering public school teachers, the current system punishes younger teachers by backloading retirement benefits, pushing the bulk of benefit accumulation toward the years close to retirement.</p>
<p>Reason Foundation Director of Government Reform Leonard Gilroy recently interviewed Sen. Hill on his social infrastructure PPP legislation, the need to reform the state teachers&rsquo; pension system, and more.</p>
<hr />
<p><br /><strong>Leonard Gilroy, Reason Foundation: During the last two legislative sessions you proposed enabling legislation to allow for public-private partnerships (PPPs) in the development of &ldquo;social infrastructure,&rdquo; meaning a broad array of government buildings. That legislation was ultimately enacted this year. What prompted your interest in social infrastructure PPPs?</strong></p>
<p><img src="http://reason.org/images/76ab98419cc93974433c0967b642d5fe.jpg" alt="" width="175" align="right" border="0" hspace="4" /><strong>Georgia State Senator Hunter Hill:</strong> The issue came to my attention once I got into government as I learned about how constrained our budgets are at the state level and the local level for providing facilities that the public needs. As costs have increased in health care and other human services, infrastructure dollars have really taken a downturn in terms of their prevalence within the budget. It just seemed to me that we should leverage the capital, innovation and expertise of the private sector in delivering government facilities. PPPs help the taxpayer get a better value, and they help the public side get a better understanding of how to deliver projects to meet a public need.</p>
<p><strong>Gilroy: Are there particular needs on the social infrastructure front in Georgia that helped drive this legislation forward?</strong></p>
<p><strong>Hill</strong>: No, it wasn&rsquo;t any one specific need. Rather, it was something I think we need to address now for the future. I think the law gives the appropriate flexibility for state and local governments to be able to address the needs that they may have now or face in the future, but it&rsquo;s also constrained enough that it keeps us fiscally responsible and protects the public from any downsides or bad ideas.</p>
<p><strong>Gilroy: At the same time your legislation was being debated in 2014, the legislature granted the University System of Georgia the ability to embark on a massive student housing PPP initiative across nine campuses, something that is now underway. Did this effort play into the discussion on your broader social infrastructure PPP legislation?</strong></p>
<p><strong>Hill</strong>: Not really. The Board of Regents has always been doing public-private partnerships, and they have a system in place that they&rsquo;re happy with. My bill was not connected to that at all; it actually didn&rsquo;t affect the Board of Regents. My bill addressed other state agencies and local governments.</p>
<p><strong>Gilroy: Are there experiences in other states that you find particularly compelling on social infrastructure PPPs?</strong></p>
<p><strong>Hill</strong>: We learned from the models in Virginia, Texas and Florida, and we had a similar initial bill that we tailored specifically to meet Georgia&rsquo;s needs. For example, we tightened the window for when state agencies could accept unsolicited bids or proposals. Unsolicited bids have always been legal, but there&rsquo;s never been a structured framework to deal with them. Because of that, in cases where they could have been beneficial, they weren&rsquo;t used, and in fact, they could have been done behind closed doors in a less vetted environment, which is not good for free markets and not good for taxpayers.</p>
<p>So by constraining when government will accept them, they&rsquo;ll know exactly when they&rsquo;re coming and will be prepared for unsolicited bids. And on the flip side, there will be more competition brought to bear when the public is telling everyone that there&rsquo;s a window in which they will accept unsolicited bids.</p>
<p>During the study committee looking at this issue back in 2013, we actually got Virginia officials on the phone with us to talk about their experiences. It was a state agency using their PPP legislation to develop a new prison facility. We tried to learn as much as we could during the process, and it was definitely beneficial.</p>
<p><strong>Gilroy: Given that the legislation creates this PPP tool for local governments too, were municipalities and school districts generally supportive? How did they react?</strong></p>
<p><strong>Hill</strong>: They were very supportive. The Georgia Municipal Association and the Association County Commissioners of Georgia were integral to getting us where we wanted to be on the legislation. Some counties will use what we&rsquo;ve given them and some won&rsquo;t. And some will use a modified structure, which we gave them the flexibility to do. But the main thing we were trying to accomplish in the bill for local governments was to provide them with a new opportunity for procurement for these facilities. Instead of government running the procurement process from start to finish, by opening it up to the private sector earlier in the process, you can leverage their innovation and expertise&mdash;and sometimes even their financing.</p>
<p><strong>Gilroy: Even though Georgia has some experience with PPPs in transportation and higher education, social infrastructure PPPs can be a complicated issue. Was there a learning curve in terms of how to communicate the value of these PPPs?</strong></p>
<p><strong>Hill</strong>: It&rsquo;s definitely a newer concept, and I think for us it was really just about repetition. That&rsquo;s why it took a couple of years to get the bill done. I don&rsquo;t think I necessarily got better at selling the idea over that time, it&rsquo;s just that if people keep hearing the same argument for years in a row it begins to sink in.</p>
<p>And in terms of really understanding the value, I don&rsquo;t think we&rsquo;re there yet. We did pass the bill, but it&rsquo;s going to take some time for this tool to be used. We passed transportation PPP legislation seven years ago, and we&rsquo;re just now beginning to see the first project underway with our managed lane project on Interstate 75.</p>
<p>It just takes time. I&rsquo;m just glad that we&rsquo;re now in the queue, if you will, by having passed this legislation. I wouldn&rsquo;t imagine that there would be any projects that result from it for another couple of years. We&rsquo;ll learn more along the way, and if there&rsquo;s a need to tweak anything, we can. But for now, we&rsquo;ll just be watching it unfold and will see what the learning process looks like moving forward.</p>
<p><strong>Gilroy: Social infrastructure PPPs are, at a general level, one way of harnessing the private sector to achieve public sector goals. What's your general philosophy on how governments and private enterprise can team up to advance the public interest?</strong></p>
<p><strong>Hill</strong>: If I were to oversimplify it, I like the old-fashioned &ldquo;Yellow Pages test&rdquo; method. If there are three companies in the Yellow Pages that can provide the service that the government needs, then it ought to be privatized. So I&rsquo;m always looking for ways to leverage the expertise and innovation of the private sector to deliver projects or services that the public sector needs. We do that pretty well in Georgia, but we can always improve.</p>
<p><strong>Gilroy: Shifting gears, you also proposed legislation to overhaul the teachers&rsquo; pension system in Georgia, an effort that was ultimately unsuccessful. You had proposed legislation that would have placed new hires in a hybrid defined-benefit/defined-contribution retirement plan. What prompted your interest in reforming the teachers&rsquo; pension system?</strong></p>
<p><strong>Hill</strong>: I introduced a bill that would move our future teachers to a 401(k)-style retirement plan. Ultimately, I want to see us incentivize and reward teachers for the great value that they&rsquo;re providing to our students today, instead of this very large deferred compensation that we have through our current defined benefit pension plan, where they&rsquo;re not getting fully rewarded for the value brought to our students until they&rsquo;re much later in their career and even into retirement. To me, that&rsquo;s not a good system&mdash;one where you&rsquo;re paying people a large portion of their compensation when they&rsquo;re not currently adding value.</p>
<p>We cannot change the commitment we&rsquo;ve made to current teachers and retirees, but I want to incentivize newly hired teachers in the future in their first ten years of work. Right now, we&rsquo;re basically letting them work for very small dollars for 10&ndash;15 years, and then right about the time when they&rsquo;re thinking they might be fed up and ready to move on, we dangle this carrot in front of them with this huge, lucrative pension to entice them to stay. It&rsquo;s just how the system works, with a backloaded benefit that works against the younger teachers. We should probably pay teachers more on the front end and give them a retirement plan that provides them with a benefit the whole time they&rsquo;re providing their value to our students.</p>
<p>We&rsquo;re behind the curve on this in Georgia, but I couldn&rsquo;t even get a second in the committee on my proposal. That&rsquo;s because there was just a lot of misinformation amongst teachers&rsquo; organizations suggesting that I was just trying to take their retirement away. I&rsquo;ll accept responsibility for the poor communication on my proposal this time around, but I&rsquo;m going to continue to work on this issue because I believe it is important not only for the retention and recruitment of future teachers&mdash;we need to be more competitive on that in Georgia&mdash;but also for the long-term fiscal trajectory of the state.</p>
<p><strong>Gilroy: What do you think stood in the way of your colleagues in terms of support for taking a look at the current system and proposed changes from a mathematical standpoint? It seems like doing an actuarial analysis was a very low-risk activity that would have had a lot of benefit in terms of building knowledge about the health of the system.</strong></p>
<p><strong>Hill</strong>: The way Georgia works, it&rsquo;s very difficult to change a retirement system, which is a good thing overall. It isn&rsquo;t something that should be easily changed. But on the flip side, to do it, you have to submit a full reform proposal to then be able to go to an actuarial study. So you have to develop a proposal to be studied, and then it gets studied, and then there&rsquo;s a financial analysis attached to that bill. Then it becomes very difficult to change that, because any changes would require it to go back for another actuarial study.</p>
<p>So the system works in favor of not changing the retirement system. And in Georgia, we have a strong executive branch in terms of how our constitution is written, so it makes it very difficult to make these changes led out of the legislature. They probably need to be led from the governor&rsquo;s office. Governor Deal has done a good job in this regard, and he&rsquo;s just set up a compensation reform committee in education, so there are now people that are going to be studying the very issue that I was trying to address.</p>
<p>I&rsquo;m not on the commission, but I&rsquo;m hoping that my philosophy will find its way on to the commission. I think we need to pay teachers more for the work they&rsquo;re providing today in lieu of the long-term guarantee that we&rsquo;re currently offering them. My proposal was portrayed as anti-teacher, but I believe that it&rsquo;s actually pro-teacher. I think it&rsquo;s a good thing for teachers to pay them more for the value that they&rsquo;re adding today. The teachers&rsquo; groups were opposed to it, but I think that&rsquo;s because they didn&rsquo;t fully understand it.</p>
<p><strong>Gilroy: Beyond the policy arguments regarding fairness and recruitment of future teachers, were there other issues&mdash;like unfunded liabilities&mdash;that also played into your proposal?</strong></p>
<p><strong>Hill</strong>: While we have some long-term fiscal challenges in our pension system like every system does, the Teachers Retirement System of Georgia is actually one of the strongest. But all of them have a long-term challenge. We&rsquo;re putting current and future taxpayers on the hook for past commitments. The fiscal sustainability and trajectory is always an issue, and while the system I proposed would be beneficial for improving the future sustainability of the system, that&rsquo;s not why I developed my proposal.</p>
<p>I did it because I think we have a cultural problem in our education system that incentivizes the wrong things through our compensation system. It incentivizes length of service instead of excellence in the classroom. It&rsquo;s more of the compensation philosophy that I think is problematic in terms of recruiting. That&rsquo;s not to say that we don&rsquo;t have great teachers&mdash;we do have great teachers, but we have them in spite of our compensation system, not because of it. We need to change this.</p>
<p>Even though my proposal this session wasn&rsquo;t successful, I think we&rsquo;ve at least started a conversation, and now we need to turn that into action.</p>
<p><strong>Gilroy: Are there other legislative initiatives on the financial or regulatory front that you have pushed or plan to push for?</strong></p>
<p><strong>Hill</strong>: We worked on putting a bill forward on education savings accounts this past session, the idea being that if someone&rsquo;s public school is not working for them, then they should be able to use the money that was allocated to them on the state formula side for other educational benefits, whether it be a private school tuition, tutoring, or even remedial training work out of this education savings account. It didn&rsquo;t get very far in the Senate this year, but it did move very quickly in the House before stalling in the Rules Committee. But it&rsquo;s still alive for next year.</p>
<p>I think it&rsquo;s a good idea to allow people that don&rsquo;t have the means to pursue a private education or other educational alternatives to be able to. We promise our children a solid education in the state of Georgia, and when their public school is not providing a solid, excellent public education, then they should have options to go elsewhere. That&rsquo;s the thought process behind the education savings account bill.</p>
<p>On the craft brewery front, there&rsquo;s a three-tier system that governs all alcohol&mdash;you&rsquo;ve got the manufacturer or brewer, the wholesaler/distributor, and then you&rsquo;ve got the retailer, which is the restaurant, bar or store. But any one entity can only do one of these things, and not the other two in this state. But it seemed to me that these small brewers, who are having to sell 100% of their craft to a distributor, are going to have a hard time getting their product to market, and while they&rsquo;re a small business that is capital-intensive, they might not have the revenues or margins and the operating costs to sustain selling their craft at such low margins. My thought was that I wouldn&rsquo;t want to take the distributors completely out of the operation, but I thought that the brewers should be able to sell a limited amount of their craft directly to the consumer so that they could enjoy higher margins, reinvest in their business, and grow their brands.</p>
<p>So that&rsquo;s what we worked on and were able to move the ball down the field and get a bill done, which was a big win. It wasn&rsquo;t exactly what we had asked for, and the distributors and retailers weighed in on that to make it a more modified approach from what we put forth. But overall I still think it&rsquo;s a win for the brewers, and now we&rsquo;ll get to see whether this construct will do what I wanted it to do, which was to create their revenues and allow them to increase their brand awareness in the market.</p>
<p><strong>Gilroy: Social infrastructure PPPs and pension reform are two very different issues, but share two key similarities: (1) they&rsquo;re complex issues, and (2) both involve paradigm shifts and a big change from the status quo. Are there any lessons you've learned thus far in how to communicate the value of these types of major reforms to your colleagues in the legislature, as well as constituents?</strong></p>
<p><strong>Hill</strong>: I saw my legislative session this year as being reform-minded and sometimes taking on status quo thought. And it is a challenge to effect change in any organization, but especially in government and politics because there&rsquo;s a tendency among politicians to be cautious. And I think that&rsquo;s a good thing. We have a fiduciary responsibility to the state, and caution is a good thing at times. But I also think that when there are proven reforms that have taken place in other states, then we should learn from that. And that&rsquo;s what I tried to do with Virginia, Florida and Texas on public-private partnerships, and Arizona on education savings accounts.</p>
<p>We need to be innovative, we need to learn from other states, and we need to be willing to take on those large silos of support that stand in opposition to reform. Legislators usually get through the session with not a lot of contention, and so when there is an issue where you are taking on those large silos of support, legislators are going to proceed with caution. So communicating around and through the opposition is valuable.</p>
<p>It&rsquo;s really just about letting people know what you&rsquo;re trying to accomplish and who it&rsquo;s going to benefit. That means challenging assumptions and challenging the arguments from people who say that a reform is going to hurt them when it will actually help them. With my craft brewery bill, in no case does it hurt distributors and retailers. I think it lifts all boats and is going to increase the energy around the craft beer industry, which helps distributors and retailers. On modifying the teachers&rsquo; retirement system, I can see why one might be afraid of these proposals but they&rsquo;re going to help the education profession and teaching in general.</p>
<p>It&rsquo;s often a matter of telling a story about how reforms are going to help everyone involved, not picking winners and losers.</p>
<hr />
<p><em>State Senator Hunter Hill was elected to the State Senate for Georgia&rsquo;s 6th District in 2012. Sen. Hill represents portions of Cobb and Fulton counties. In 2014, he was elected Majority Caucus Vice-Chairman by his colleagues.<br /><br />Sen. Hill is the Chairman of the Senate Veterans, Military and Homeland Security Committee and Vice-Chairman of the Finance Committee. He is a member of Appropriations (Vice-Chairman of the Public Safety Subcommittee), Judiciary Non-Civil, and Reapportionment and Redistricting committees. Sen. Hill is also an Ex-Officio of the Retirement and Rules committees.<br /><br />After graduating from the United States Military Academy at West Point with a Bachelor of Science degree in General Management and Civil Engineering, Sen. Hill became a 2nd Lieutenant in the United States Army. He went on to graduate from the Airborne, the Air Assault, and the U.S. Army Ranger Schools. In June 2001, Hill took command of a rifle platoon with the 101st Airborne Division, which he led into battle in Afghanistan in 2002. Sen. Hill subsequently led another platoon into battle in Iraq in 2003, and he commanded three different teams on other deployments in Iraq and Afghanistan. In addition to his combat roles, he also served as a general&rsquo;s aide in Iraq, and earned two Bronze Stars, the Meritorious Service Medal and two Army Commendation Medals.<br /><br />Sen. Hill is currently the President of Tommy Newberry Coaching, where he leverages his military, real estate development and security industry experience to lead and grow his business.<br /><br />Other articles in Reason Foundation's </em>Innovators in Action 2015<em> series are <a href="http://reason.org/publications/innovators/2015.html">available online here</a>.</em></p>1014331@http://www.reason.orgWed, 29 Jul 2015 17:30:00 EDTleonard.gilroy@reason.org (Leonard Gilroy)Innovators in Action 2015http://www.reason.org/news/show/innovators-in-action-2015
<p>Reason Foundation's <em>Innovators in Action</em>&nbsp;series,&nbsp;which profiles innovative policymakers in their own words, highlights good government efforts that are delivering real results and value for taxpayers. Edited by Reason's <a href="../experts/show/leonard-gilroy" target="_blank">Leonard Gilroy</a>, the&nbsp;<em>Innovators in Action 2015</em>&nbsp;series profiles a range of innovators who have demonstrated leadership through action on privatization, competition, government re-invention and other market-based policy reforms designed to reduce the costs of government and deliver more value to taxpayers. Innovator interviews or self-penned articles will be added regularly throughout the year, so be sure to check back frequently for new content.</p>
<p>The&nbsp;<em>Innovators in Action 2015</em>&nbsp;series profiles released to-date are listed below:</p>
<ul>
<li><a href="../show/infrastructure-pensions-georgia" target="_blank">Taking on Infrastructure, Pension Challenges in Georgia</a><br />Interview with Georgia State Senator Hunter Hill<br />Leonard Gilroy<br />July 29, 2015</li>
<li><a href="../show/best-value-procurement-oklahoma" target="_blank">Implementing Best Value Procurement in Oklahoma</a><br />Interview with Steve Hagar, State Purchasing Director, Oklahoma<br />Leonard Gilroy<br />May 8, 2015</li>
<li><a href="../show/public-safety-pension-reform-teques" target="_blank">Reforming Public Safety Pensions in Tequesta, Florida</a><br />Interview with Michael Couzzo, Village Manager, Village of Tequesta, Florida<br />Leonard Gilroy<br />February 25, 2015</li>
</ul>
<div>
<p>Earlier editions of Reason's&nbsp;<em>Innovators in Action</em>&nbsp;are available here:</p>
<ul>
<li><a href="../show/innovators-in-action-2014" target="_blank">Innovators in Action 2014</a></li>
<li><a href="../show/innovators-in-action-2013" target="_blank">Innovators in Action 2013</a></li>
<li><a href="../show/innovators-in-action-2012" target="_blank">Innovators in Action 2012</a></li>
<li><a href="../show/innovators-in-action-2009">Innovators in Action 2009</a></li>
<li><a href="../show/innovators-in-action-2008">Innovators in Action 2008</a></li>
<li><a href="../show/innovators-in-action-2007">Innovators in Action 2007</a></li>
</ul>
</div>1014171@http://www.reason.orgWed, 29 Jul 2015 17:30:00 EDTleonard.gilroy@reason.org (Leonard Gilroy)Proposed Pension Initiative Threatens the California Rulehttp://www.reason.org/blog/show/proposed-pension-initiative-threate
<p>California unions have taken issue with a <a href="http://calpensions.com/2015/07/13/unions-say-initiative-allows-future-pension-cuts/">proposed</a> statewide pension reform initiative that would <a href="https://oag.ca.gov/system/files/initiatives/pdfs/15-0033%20(Pension%20Reform).pdf?">give</a> voters &ldquo;the power to approve or reject compensation and retirement benefits of government employees." Public employee unions do not like the initiative and are particularly concerned about its potential to overturn the "California Rule."</p>
<p>The <a href="http://reason.org/files/overprotecting_pensions_california_rule.pdf">California Rule</a> is a 1955 California court creation that forbids the reduction of pension benefits for current government employees unless the reduction is accompanied by an offsetting increase in benefits. A consequence of the California Rule is that pension benefits for public employees can never be decreased, even if the costs of the pension benefits are unsustainable. Thus, the California Rule limits pension reform efforts to future employees&mdash;those who haven&rsquo;t been hired yet.</p>
<p>The California Rule is predicated on the Contract Clauses of the U.S. Constitution and California&rsquo;s state Constitution, both of which forbid California from passing laws impairing the obligation of contracts. Although the legal presumption is that statutes do not form contracts, California courts have decided the state's pension laws do amount to contracts between the state and public employees.</p>
<p>Granting contractual protection to pension benefits a worker has already earned is appropriate. The newly proposed statewide initiative is unmistakably clear on this point <a href="https://oag.ca.gov/system/files/initiatives/pdfs/15-0033%20(Pension%20Reform).pdf?">stating</a>, &ldquo;Nothing in this section shall be interpreted to reduce the retirement benefits earned by government employees for work performed."</p>
<p>Future pension changes, for work yet to be performed, are different matter. Employees do not have contractual rights to pension benefits they have not earned yet. The United States Supreme Court has <a href="https://scholar.google.com/scholar_case?case=3804152025733106029&amp;q=276+U.S.+174+(1928)&amp;hl=en&amp;as_sdt=4,60">held</a> future public employee benefits, as well as any other condition of employment, can be changed. California courts follow this line of reasoning for most facets of employee compensation&mdash; employees' salaries can be reduced, their working conditions can change, and they can be terminated&mdash;yet the state&rsquo;s courts have given unearned pension benefits untouchable, sacred status.</p>
<p>Putting the legal issues aside, the proposed pension reform initiative makes sense from a policy perspective. California's state and local pensions have billions of dollars in unfunded liabilities so pension reform is unavoidable. If a state worker is 30 years-old and decades away from retirement, policymakers should be able to reform the pension benefits that worker will receive 35 years from now.</p>
<p>And since California citizens will be required to pay for the growing pension obligations, either through increased taxes or decreased services, permitting residents to vote on pension increases is reasonable.</p>1014322@http://www.reason.orgWed, 22 Jul 2015 16:17:00 EDTadam.crepelle@reason.org (Adam Crepelle)New Jersey Residents Will Get Fewer Services as Public Pension Costs Skyrockethttp://www.reason.org/news/show/new-jerseys-public-pension-costs-ar
Star-Ledger <p>It's no secret that New Jersey's government worker pension systems are a looming fiscal disaster. What may not be clear to taxpayers at this point is that unless meaningful reforms are enacted to rein in the problem, spending on pensions will increasingly poach funds from other government services.</p>
<p>In effect, spending on government services like K-12 education, policing and higher education will be crowded out by the costs of benefits for a workforce that is no longer working.</p>
<p>The&nbsp;<a href="http://www.nj.com/politics/index.ssf/2015/06/nj_supreme_court_spares_christie_in_billion_dollar.html">New Jersey Supreme Court recently ruled that the Christie administration's $1.6 billion cut</a>&nbsp;to the state's required annual pension contribution for 2015 fiscal year to help balance the budget was legal. Unions had challenged the cuts as a violation of the state's 2011 pension reform law requiring increased annual pension contributions after years of underfunding.&nbsp;<br /><br />While the administration may be breathing a sigh of relief that it won't have to restore those cuts given the state's empty coffers, the ruling simply leaves more pension debts to be paid by future taxpayers.&nbsp;<br /><br />Worse, pension costs are set to skyrocket regardless.&nbsp;<a href="http://www.state.nj.us/treasury/pdf/FinalFebruaryCommissionReport.pdf">In its February report</a>, the New Jersey Pension and Health Benefit Study Commission found that current required pension costs total $3.73 billion annually, and the state treasurer estimates that those costs are set to rise to almost&nbsp;<a href="http://www.wsj.com/articles/nj-cant-cut-enough-spending-to-make-full-pension-payment-officials-1432070170">$6 billion annually in the coming years</a>.</p>
<p>It's important to understand that the state is in this predicament because its leaders systematically underfunded pensions going back at least a decade, in part because they preferred to spend the money on other state services. In fact, the vast majority of the state's current annual pension costs are dedicated to paying down&nbsp;<a href="http://www.nj.com/politics/index.ssf/2014/12/christie_administration_quietly_doubles_pension_liability_estimate.html">the massive $83 billion unfunded pension liability</a>, which is effectively debt.</p>
<p>The irony is that by deciding to skimp on pensions to pay for other services in the past, officials basically guaranteed that the reverse would happen in the future. The pension debts are going to have to be paid, and pension costs are likely to rise&mdash;and current services suffer&mdash;as a result.</p>
<p>The consequences will be felt in communities throughout the state. As more of our tax dollars are spent on paying out pensions, life in New Jersey will become grim. The Garden State will look more like bankrupt cities such as Detroit.</p>
<p>Cities will receive less in state aid, resulting in children attending schools that are in disrepair, with fewer teachers and less and less extracurricular activities. Funds for firefighting and policing will be cut. Volunteer firefighters might not get reimbursed for their training expenses. Therefore, fewer will be able to afford to volunteer.</p>
<p>The coffers of our EMS training fund are often empty now given existing budgetary pressures. With local governments also struggling to pay their bills while operating under&nbsp;<a href="http://www.nj.com/news/index.ssf/2010/07/gov_christie_signs_2_percent_p.html">a 2 percent property tax cap</a>, many do not have the resources to hire EMS workers, nor do they have the money necessary to train volunteers. Fewer available volunteer fire and EMS personnel literally could be the difference between life and death.</p>
<p>Frankly, it is scary to think what will happen as we deplete the resources of those who keep us safe.</p>
<p>Meanwhile, the basic services we have come to expect in our local communities will also suffer. Higher pension payouts will not only make it harder for local governments to retain and hire police, but to maintain parks and recreation areas. Core functions such as road maintenance, garbage collection and snow removal may also have to be scaled back to cope with the crisis. These are the types of services which add to the vibrancy of our communities and also preserve property values.</p>
<p>The future does not have to be as bleak as it looks today, but&nbsp;<a href="http://www.nj.com/opinion/index.ssf/2015/06/a_workable_template_for_solving_njs_pension_and_he.html">it will require policymakers to unite in pursuit of a strategy to immediately stop digging the hole deeper</a>&nbsp;by shifting all new workers into more sustainable retirement plans, like the 401(k)-style plan proposed by the Study Commission. It would also require the state to commit to consistently plowing the future savings created by converting to a less generous retirement system back into paying off the debt of the current system, which would help alleviate some of the impact on state services.</p>
<p>This may seem like a tall order, but there's no other choice. The status quo is unsustainable, and the financial reality is non-negotiable. The choice for policymakers is simple: fix the pension system now, or watch quality of life suffer as ever more dollars are siphoned off to a broken pension system.</p>
<p><em>Leonard Gilroy is director of government reform at Reason Foundation. Erica Klemens is state director of the Americans for Prosperity&mdash;New Jersey. This article originally appeared in the <a href="http://www.nj.com/opinion/index.ssf/2015/06/with_nj_forced_to_eventually_cover_pensions_paymen.html#incart_river_mobile">Star-Ledger</a>.</em></p>1014300@http://www.reason.orgTue, 07 Jul 2015 09:00:00 EDTleonard.gilroy@reason.org (Leonard Gilroy)Paying Down Unfunded Pension Liabilities Through Asset Sales and Leaseshttp://www.reason.org/news/show/assets-unfunded-pension-liabilities
<p>State and local governments across the nation are facing massive unfunded public pension liabilities, with estimates ranging anywhere from $1.1 trillion to $4.7 trillion. Fortunately, there is now a robust discussion about pension reform. That discussion has focused mainly on reforms to government employee retirement plans, such as changes to future pension benefits that have not yet been earned and shifts to defined-contribution or cash balance plans. Such policies are designed to make pension systems more financially sustainable and avoid <em>additional</em> unfunded liabilities, and they form a critical foundation of any serious pension reform effort.</p>
<p>However, to date there has been relatively little discussion about how to reduce <em>existing</em> unfunded liabilities. One problem is that any reform that would result in significant reductions in already-promised benefits to current workers and retirees understandably has little public support and may face major legal and political obstacles. That means municipalities and states with underfunded pension systems will, at some point, have to make additional contributions in order to meet their obligations.</p>
<p>From an accounting and legal standpoint, unfunded pension liabilities have not historically been treated in the same manner as general obligation bonds and other types of public debt. Yet, pension liabilities are implicitly an off-balance-sheet debt obligation of the government. As such, there is an urgent need not only to account for them properly but also to fund them in ways that impose the least additional burden on taxpayers.</p>
<p>One promising strategy that policymakers are starting to consider is the sale or lease of government assets&mdash;such as land, buildings, infrastructure or enterprises&mdash;and the use of proceeds to pay down existing pension debts and thereby put public pension systems on a healthier financial footing. This brief considers such an approach as a complement to comprehensive pension reform efforts that seek to reduce future unfunded liabilities by shifting away from traditional defined-benefit pension systems.</p>1014282@http://www.reason.orgMon, 29 Jun 2015 00:00:00 EDTleonard.gilroy@reason.org (Leonard Gilroy)Pension Reform Newsletter - June 2015http://www.reason.org/news/show/pension-reform-newsletter-june-2015
<p><em>This newsletter highlights articles, research, opinion, and other information related to public pension problems and reform efforts across the nation. To find previous editions, please visit <a href="http://reason.org/newsletters/pensionreform/">http://reason.org/newsletters/pensionreform/</a>.&nbsp;</em></p>
<p><strong>Articles, Research &amp; Spotlights</strong></p>
<ul>
<li>New California Pension Initiative Announced: Voter Empowerment Act of 2016</li>
<li>Privatization&nbsp;Can&nbsp;Help&nbsp;Cover&nbsp;Costa&nbsp;Mesa's&nbsp;Rising&nbsp;Pension&nbsp;Costs</li>
<li>Should&nbsp;Public&nbsp;Workers&nbsp;Get&nbsp;Special&nbsp;Treatment?</li>
<li>How Will State Courts Rule on Pension Reforms? Pension Law Map Gives Guidance</li>
<li>Public Pension Plans: A False Recovery</li>
<li>Dubious Practices in Public Pensions</li>
<li>California Hides Most of Its Unfunded Retirement Debt</li>
<li>S&amp;P State Pension Review&nbsp;</li>
</ul>
<p><strong>Quotable Quotes on Pension Reform</strong></p>
<p><strong>Pension Reform Handbook</strong></p>
<p><strong>Contact the Pension Reform Help Desk </strong></p>
<p><strong>&nbsp; &nbsp; &nbsp; &nbsp; &nbsp;</strong></p>
<p><strong>Articles, Research &amp; Spotlights</strong></p>
<p><strong>New California Pension Initiative Announced: Voter Empowerment Act of 2016<br /> <em>By Pete Constant, Reason Foundation</em></strong></p>
<p>On June 4, a bipartisan coalition of politicians and business people, led by former San Jose Mayor Chuck Reed and former San Diego Councilmember Carl DeMaio, filed a <a href="http://reason.org/blog/show/the-voter-empowerment-act-of-2016">pension reform ballot initiative</a> with the California Secretary of State. <br /> <br /> Unlike many other efforts targeting pension reform, this initiative does not dictate how various government agencies approach their own, unique circumstances, instead requiring that local voters approve of the pension benefits being promised to any new employees.<br /> <br /> While not impacting current employees or retirees, the Voter Empowerment Act of 2016 would give voters the right to approve, or reject, the compensation and retirement benefit promises made to new employees, as well as requiring voter approval before pension benefits are enhanced for any current or future employee. The proposed state constitutional amendment covers the retirement benefits offered by <em>all</em> state and local government agencies, including the state itself, cities, counties, school districts, the University of California and California State University systems, and special districts. <br /> <br /> If an agency finds that their voting residents don&rsquo;t approve of a defined benefit plan for new employees, the act allows those agencies to use the collective bargaining process to agree on other types of retirement benefits, potentially including the 401(k)-style defined contribution plans already being offered by CalPERS, CalSTRS and other pension plan providers, without voter approval.</p>
<p>&nbsp;</p>
<p>To read more about the initiative, go <a href="http://reason.org/blog/show/the-voter-empowerment-act-of-2016">here</a> and <a href="http://reason.com/blog/2015/06/04/new-initiative-filed-in-california-puts">here</a>.</p>
<p><a name="14307d1cd3998348_Quotes"></a><strong>Privatization Can Help Cover Costa Mesa's Rising Pension Costs<br /><em>By Leonard Gilroy, Reason Foundation</em></strong></p>
<p>As the Register&rsquo;s Editorial Board recently noted, Costa Mesa&rsquo;s Pension Oversight Committee presented data to the City Council showing that the city&rsquo;s total annual payments to the pension system are going to skyrocket, rising from approximately $25 million this year to almost $40 million a year by 2030. Even scarier, the analysis showed that pension costs are increasing at roughly twice the rate of overall city revenue (approximately 6.5 percent versus 3 percent, respectively). <br /> <br /> The rising cost of government employee pensions in Costa Mesa has long been recognized as a major fiscal problem. In fact, the pension costs were a motivating factor behind the large-scale &ndash; and ultimately failed &ndash; attempts to privatize city services in recent years because pensions have been swallowing a growing share of the city budget. This trend will only continue to worsen for Costa Mesa residents, which is why privatization should remain a serious pursuit. <br /> <br /> In 2012 courts blocked a sweeping privatization initiative that would have contracted out 18 services performed by over 100 city employees. Ironically, by blocking privatization and fighting the city charter movement to protect current workers, unions are basically guaranteeing a long-term decline in the city workforce, since pension costs will increasingly squeeze out spending on the future workforce.</p>
<p>To read more about the issue, go <a href="http://reason.org/news/show/privatization-can-help-cover-rising">here</a>.</p>
<p><strong>Should Public Workers Get Special Treatment?<br /><em>By Pete Constant, Reason Foundation</em></strong></p>
<p>A few years ago, it was easy to blame the state&rsquo;s growing public pension crisis on the recession and sluggish economic recovery. But today, the Dow Jones Industrial Average is regularly above 18,000, the national unemployment rate is 5.5 percent, California&rsquo;s unemployment rate is 6.5 percent and the state&rsquo;s General Fund tax receipts are even higher than expected for the fiscal year.<br /> <br /> And yet, California&rsquo;s unfunded pension and health-care liabilities continue to grow. Last year, Mac Taylor of the nonpartisan Legislative Analyst&rsquo;s Office reported that the California State Teachers Retirement System &ldquo;has not been appropriately funded for most of its 101-year history.&rdquo; He noted CalSTRS&rsquo; unfunded liabilities rose from $23 billion in 2003 to over $73 billion in 2013.</p>
<p>A number of elected leaders who have been working to reform the system are being frustrated by adverse rulings by the Public Employment Relations Board and the courts. These rulings have exposed the astounding differences in the way we treat government pension systems compared to the pension systems of private companies.</p>
<p>&nbsp;</p>
<p>To read more about the issue, go <a href="http://reason.org/news/show/why-do-public-pension-systems-get-s">here</a>.</p>
<p><strong>How Will State Courts Rule on Pension Reforms? Pension Law Map Gives Guidance<br /></strong><em><strong>By Adam Crepelle, Reason Foundation</strong></em></p>
<p>The New Jersey Supreme Court <a href="http://www.judiciary.state.nj.us/opinions/supreme/A-55-14BurgosvState).pdf">recently upheld</a> payment reductions to the state's pension fund. A month before, the Illinois Supreme Court <a href="http://www.illinoiscourts.gov/opinions/supremecourt/2015/118585.pdf">rejected the state's pension reform efforts</a>. Both states have among the worst pension funding levels in the country, and Illinois is sinking faster than New Jersey. So what explains the different court rulings?<br /> <br /> The answer in part is the states offer their public pensions different levels of protection. In states that view public pensions as contracts, The United States Constitution forbids states from making laws impairing contractual obligations, and many state constitutions have a similar prohibition. Determining whether modifications to contractually protected pensions are constitutional <a href="https://scholar.google.com/scholar_case?q=+U.S.+Trust+Co.+v.+New+Jersey,+431+U.S.+1,+17+(1977))&amp;hl=en&amp;as_sdt=2006&amp;case=15238053046927037053&amp;scilh=0">requires a three step inquiry</a>:<br /> <br /> 1. Is there a contractual relationship?<br /> 2. Has the contractual relationship been substantially impaired? &nbsp;<br /> 3. Was the change reasonable and necessary to serve an important public purpose?<br /> <br /> On the other hand, states that treat pensions as a property interest have a better chance at reforming pensions. Property rights apply to what one already has, not prospective gains. Thus, states can modify future benefits but not previously accrued benefits. Altering future benefits under the property approach requires:&nbsp;<br /> <br /> 1. No individual be deprived of a fundamental right.<br /> 2. The state not act in a manner so "arbitrary and outrageous" that the conduct "shocks the conscience."<br /> <br /> Accordingly, states that treat pensions as a property interest have a better chance at bringing pension benefits to a sustainable level than states where pensions are considered contracts. <strong><br /> </strong></p>
<p>To read more about the issue, go <a href="http://reason.org/blog/show/pension-reform-map">here</a>.</p>
<p>&nbsp;</p>
<p><strong>Public Pension Plans: A False Recovery<br /></strong><em><strong>By Truong Bui, Reason Foundation</strong></em></p>
<p>&nbsp;</p>
<p>Rising stock markets have improved the funding levels of many public pension plans, prompting some to claim that the national pension crisis is overblown. Pension expert Andrew Biggs in a <a href="http://www.wsj.com/articles/the-public-pension-funding-trap-1433109363">recent op-ed on the WSJ</a> shows how misleading this claim is.</p>
<p>&nbsp;</p>
<p>While public plans&rsquo; overall funded status rose from 72 percent to 76 percent in 2014, it was a far cry from a real recovery. Less than half of state and local plans (41 percent) paid their annual required contributions in full last year, down from 65 percent in 2008. Even plans that did pay the full contributions relied on overly high discount rates that undervalue liabilities, and consequently underestimate required contributions. If the US public plans followed the same accounting rules as their private counterparts, annual required contributions would about double. This means most public plans are not meeting a very low bar in the first place.</p>
<p>&nbsp;</p>
<p>High discount rates and low contributions encourage US public plans to take excessive investment risks to earn higher returns. In fact, the average plan invests 72 percent of its fund in stocks and other risky assets. This high level of risk taking however does not guarantee the returns those plans expect. While the expected rate of return of most plans ranges from 7 percent to 8 percent, the median projected return over the next decade for a portfolio of 70 percent stocks and 30 percent bonds is only 5.9 percent.</p>
<p>&nbsp;</p>
<p>To read the full article, go <a href="http://www.wsj.com/articles/the-public-pension-funding-trap-1433109363">here</a>.</p>
<p>&nbsp;</p>
<p><strong>Dubious Practices in Public Pensions<br /></strong><em><strong>By Truong Bui, Reason Foundation</strong></em></p>
<p>&nbsp;</p>
<p>A <a href="http://unionwatch.org/look-out-for-these-pension-gimmicks/">recent article</a> by Joe Luppino-Esposito and Bob Williams describes popular practices by public pension plans to obscure the true costs of pension funding and to push those costs far into the future. Those practices include:</p>
<ul>
<li>Outdated life expectancy assumptions: longer life expectancy increases pension costs. Outdated assumptions that underestimate life expectancy, therefore, cause plans to set aside inadequate resources for future benefit payouts.</li>
<li>Inflated discount rates: by using the higher expected investment rate of return rather than the lower market-valued discount rate to value pension liabilities, public plans artificially reduce required contributions while increasing contingent liabilities on future taxpayers.</li>
<li>Underfunding required contributions: not paying the required contributions creates unfunded liabilities that are compounded at the discount rate.</li>
<li>Pension obligation bonds (POBs): POBs allow state and local governments to cover unfunded liabilities while taking advantage of low interest rates. This practice however encourages underfunding annual required contributions and risks plunging those governments into more debt when actual returns fall short of the interest rate on the bonds.</li>
<li>Rolling amortization and smoothing: rolling amortization potentially increases the unfunded liability to infinity and never truly pays off the debt.</li>
</ul>
<p>&nbsp;</p>
<p>To read the full article, go <a href="http://unionwatch.org/look-out-for-these-pension-gimmicks/">here</a>.</p>
<p><strong>California Hides Most of Its Unfunded Retirement Debt<br /></strong><em><strong>By Truong Bui, Reason Foundation</strong></em></p>
<p>&nbsp;</p>
<p>A <a href="http://www.statedatalab.org/library/doclib/CA-FSOS-2014-1.pdf">recent report</a> by Truth in Accounting reveals that California hides 74 percent of its unfunded retirement debt from its balance sheet. According to the report, the state owes $150 billion in unfunded retirement benefits, but discloses only $39 billion of these liabilities. Including the hidden debt means that the state owes $328 billion in total, but only has $94 billion available to pay the bills, leaving a shortfall of $235 billion, which is equivalent to $20,900 per taxpayer.</p>
<p>&nbsp;</p>
<p>To read the full report, go <a href="http://www.statedatalab.org/library/doclib/CA-FSOS-2014-1.pdf">here</a>.</p>
<p>&nbsp;&nbsp;</p>
<p><strong>S&amp;P State Pension Review<br /></strong><em><strong>By Truong Bui, Reason Foundation</strong></em></p>
<p>&nbsp;</p>
<p><a name="OLE_LINK4"></a><a name="OLE_LINK3"></a>S&amp;P in a <a href="https://www.globalcreditportal.com/ratingsdirect/renderArticle.do?articleId=1405789&amp;SctArtId=322548&amp;from=CM&amp;nsl_code=LIME&amp;sourceObjectId=9183713&amp;sourceRevId=1&amp;fee_ind=N&amp;exp_date=20250617-21:28:59">recent review</a> of state pension plans provides some key insights into the state of pension reform and pension funding in the US. The rating agency affirms the important role pension funding status plays in a state&rsquo;s creditworthiness. While pension liabilities are not an immediate threat to most state&rsquo;s finances, S&amp;P believes that these obligations when mismanaged do adversely affect a state&rsquo;s credit profile.</p>
<p>&nbsp;</p>
<p>State pension funded levels improved slightly in 2013, but the gap between well-funded and poorly funded plans remains substantial. Despite strong market returns, funding ratios of 24 states declined compared to the previous year.</p>
<p>&nbsp;</p>
<p>S&amp;P stresses the significance of fully funding the annual required contribution (ARC). It also notes the incentive of many state governments to defer full ARC payments for short-term budgetary needs, eventually creating distressed situations in the long term. Underfunding ARCs, therefore, has a potential of negatively affecting credit ratings.</p>
<p>&nbsp;</p>
<p>The report identifies a number of factors that have slowed down pension reform efforts. One possible factor is &ldquo;reform fatigue&rdquo;: as it takes so much political capital to effect measures that produce small short-term benefits, legislators with limited terms have few incentives to continuously push for reform. Another factor is recent court rulings that challenge past reforms on constitutional grounds. Combined with recent strong market returns and competing priorities, these factors seem to have discouraged the need for reform.</p>
<p>To read the full report, go <a href="https://www.globalcreditportal.com/ratingsdirect/renderArticle.do?articleId=1405789&amp;SctArtId=322548&amp;from=CM&amp;nsl_code=LIME&amp;sourceObjectId=9183713&amp;sourceRevId=1&amp;fee_ind=N&amp;exp_date=20250617-21:28:59">here</a>.</p>
<p><strong>&nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;&nbsp;</strong><strong><br /></strong></p>
<p><strong>Quotable Quotes</strong><strong> on Pension Reform</strong></p>
<p>&ldquo;Let me describe this more clearly. If the state has promised a worker certain payments in the future for having worked at least up to this date&mdash;so-called accrued benefits&mdash;and it is certain that those payments are going to be made, anybody, any economist, and probably most of you in this room would ask, how do you value that? It&rsquo;s simple. You find US Treasury securities that would provide cash flows to match those payments. That is how you should value the liability.&rdquo;<br />- <em><a href="https://transparentcaliforniablog.wordpress.com/2015/06/04/nobel-laureate-public-pensions-are-a-disaster-and-rely-on-idiotic-accounting/">William F. Sharpe, Nobel Laureate</a></em></p>
<p>&ldquo;U.S. state and local governments are required to contribute half as much to their pensions as are private employers, and six-in-10 public plans fail to receive even that low required contribution. If public pensions are indeed back on track, that track may simply be leading the country to more trouble down the road.&rdquo;<br />- <em><a href="http://www.wsj.com/articles/the-public-pension-funding-trap-1433109363">Andrew Biggs, resident scholar at the American Enterprise Institute</a></em></p>
<p>&ldquo;Borrowing money is not a fix. It kicks the can down the road and steals from our children and grandchildren.&rdquo;<br /><em>- </em><a href="http://www.nytimes.com/2015/05/28/business/dealbook/borrowing-to-replenish-depleted-pensions.html?_r=1"><em>Barry Shutt, retired state worker</em></a></p>
<p>&ldquo;The deals are generally pitched to state and local officials as an arbitrage play: The government will issue the bonds; the pension system will invest the proceeds; and the investments will earn more, on average, than the interest rate on the bonds. The projected spread between the two rates makes it look as if the government has refinanced its pension shortfall at a lower interest rate, saving vast sums of money.</p>
<p>But that&rsquo;s just on paper. In reality, the investment-return assumption is just that &mdash; an assumption, and a deceptive one at that because it does not take risk into account.&rdquo;<br />- <em><a href="http://www.nytimes.com/2015/05/28/business/dealbook/borrowing-to-replenish-depleted-pensions.html?_r=0">Mary Williams Walsh, American investigative journalist</a></em></p>
<p>&ldquo;It boils down to this: Decision-makers with the short-term incentive to make outlandish promises were able to ignore long-term costs.&rdquo;<br />- <a href="http://www.goerie.com/article/20150603/OPINION09/306039989/public-pensions-make-false-promises-keith-naughton">Keith Naughton, public affairs consultant</a></p>
<p>&nbsp;&nbsp;<strong> &nbsp; &nbsp; &nbsp; &nbsp;</strong></p>
<p><strong>Pension Reform Handbook</strong></p>
<p>&nbsp;</p>
<p>For those interested in the process and mechanics of pension reform, Lance Christensen and Adrian Moore published a <a href="http://reason.org/news/show/pension-reform-handbook-a-starter-g">comprehensive starter guide</a> for state and local reformers. This handbook aims to capture the experience of policymakers in those jurisdictions that have paved the way for substantive reform, and bring together the best practices that have emerged from their reform efforts, as well as the important lessons learned.</p>
<p>&nbsp;</p>
<p>To access the handbook, go <a href="http://reason.org/news/show/pension-reform-handbook-a-starter-g">here</a>.</p>
<p>&nbsp;<strong> &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;</strong></p>
<p><a name="14307d1cd3998348_Contact"></a><strong>Contact</strong><strong>&nbsp;</strong><strong>the Pension Reform Help Desk</strong></p>
<p>&nbsp;</p>
<p>Reason Foundation set up a Pension Reform Help Desk to provide information on Reason's work on pension reform and resources for those wishing to pursue pension reform in their states, counties, and cities. Feel free to contact the Reason Pension Reform Help Desk by e-mail at&nbsp;pensionhelpdesk&#64;reason.org.</p>
<p>***&nbsp;</p>
<p><a name="OLE_LINK17"></a><a name="OLE_LINK16"></a><em>Follow the discussion on pensions and other governmental reforms at&nbsp;</em><em>Reason Foundation's website</em><em>or on&nbsp;</em><em>Twitter &#64;ReasonReform</em><em>. As we continually strive to improve the publication, please feel free to send your questions, comments and suggestions to&nbsp;</em><a href="mailto:adrian.moore&#64;reason.org"><em>adrian.moore&#64;reason.org</em></a><em>.</em></p>
<p>&nbsp;</p>
<p><strong><em>Adrian Moore<br /></em></strong><strong><em>Vice President, Policy<br /></em></strong><strong><em>Reason Foundation</em></strong></p>1014295@http://www.reason.orgThu, 25 Jun 2015 13:43:00 EDTadrian.moore@reason.org (Adrian Moore)S&P State Pension Review http://www.reason.org/blog/show/sp-state-pension-review
<p>S&amp;P in a <a href="https://www.globalcreditportal.com/ratingsdirect/renderArticle.do?articleId=1405789&amp;SctArtId=322548&amp;from=CM&amp;nsl_code=LIME&amp;sourceObjectId=9183713&amp;sourceRevId=1&amp;fee_ind=N&amp;exp_date=20250617-21:28:59">recent review</a> of state pension plans provides some key insights into the state of pension reform and pension funding in the US. The rating agency affirms the important role pension funding status plays in a state&rsquo;s creditworthiness. While pension liabilities are not an immediate threat to most state&rsquo;s finances, S&amp;P believes that these obligations when mismanaged do adversely affect a state&rsquo;s credit profile.</p>
<p>State pension funded levels improved slightly in 2013, but the gap between well-funded and poorly funded plans remains substantial. Despite strong market returns, funding ratios of 24 states declined compared to the previous year.&nbsp;</p>
<p>S&amp;P stresses the significance of fully funding the annual required contribution (ARC). It also notes the incentive of many state governments to defer full ARC payments for short-term budgetary needs, eventually creating distressed situations in the long term. Underfunding ARCs, therefore, has a potential of negatively affecting credit ratings.</p>
<p>The report identifies a number of factors that have slowed down pension reform efforts. One possible factor is &ldquo;reform fatigue&rdquo;: as it takes so much political capital to effect measures that produce small short-term benefits, legislators with limited terms have few incentives to continuously push for reform. Another factor is recent court rulings that challenge past reforms on constitutional grounds. Combined with recent strong market returns and competing priorities, these factors seem to have discouraged the need for reform.</p>
<p>To read the full report, go <a href="https://www.globalcreditportal.com/ratingsdirect/renderArticle.do?articleId=1405789&amp;SctArtId=322548&amp;from=CM&amp;nsl_code=LIME&amp;sourceObjectId=9183713&amp;sourceRevId=1&amp;fee_ind=N&amp;exp_date=20250617-21:28:59">here</a>.</p>1014294@http://www.reason.orgThu, 25 Jun 2015 13:36:00 EDTtruong.bui@reason.org (Truong Bui)Why Do Public Pension Systems Get Special Treatment?http://www.reason.org/news/show/why-do-public-pension-systems-get-s
Orange County Register <p>A few years ago, it was easy to blame the state&rsquo;s growing public pension crisis on the recession and sluggish economic recovery.</p>
<p>But today, the Dow Jones Industrial Average is regularly above 18,000, the national unemployment rate is down to 5.5 percent, California&rsquo;s unemployment rate is down to 6.5 percent, and the state&rsquo;s General Fund tax receipts are even higher than estimated for the fiscal year.</p>
<p>And yet, California&rsquo;s unfunded pension and health-care liabilities continue to grow. Last year, Mac Taylor of the nonpartisan Legislative Analyst&rsquo;s Office reported that the California State Teachers Retirement System, CalSTRS, &ldquo;has not been appropriately funded for most of its 101&ndash;year history.&rdquo; He noted CalSTRS&rsquo; unfunded liabilities rose from $23 billion in 2003 to over $73 billion in 2013.</p>
<p>Similarly, the California Public Employees&rsquo; Retirement System, CalPERS, reported $57.4 billion in unfunded liabilities for 2013. And according to the state treasurer, the unfunded health care and dental benefits for state workers was $71.8 billion in 2014, up from $64.6 billion in 2013.</p>
<p>&ldquo;This is a liability that has grown over decades of poor fiscal planning and a callous willingness to pass along debt to our children&rsquo;s generation,&rdquo; State Controller John Chiang said last December. &ldquo;While it can&rsquo;t be erased overnight, we have to resolve ourselves to meaningful progress. Let that first step be a commitment that liabilities created by one generation of Californians be fully paid by that generation and not passed off to the next.&rdquo;</p>
<p>A number of elected leaders who have been working to reform the system are being frustrated by adverse rulings by the Public Employment Relations Board and the courts. These rulings have exposed the astounding differences in the way we treat government pension systems compared to the pension systems of private companies.</p>
<p>Federal law, under the Employee Retirement Income Security Act of 1974 and the Pension Protection Act of 2006, requires action when private pension funding levels drop below acceptable levels.</p>
<p>Private pension plans are required to develop rehabilitation plans to get back on solid financial footing.</p>
<p>Federal law requires that employers reduce, or even eliminate, certain benefits and pay temporary surcharges of 5-to-10 percent in addition to annually required pension contributions while they get pension plans back in compliance with the law.</p>
<p>Meanwhile, California&rsquo;s public agencies are prohibited from taking similar actions to shore up the pension systems for government workers.</p>
<p>In a Reason Foundation paper, Emory Law School Professor Sasha Volokh explained, &ldquo;California and about a dozen other states hold that there&rsquo;s a contractual right in pension promises from the very beginning of employment; thus, a state can fire you, lower your salary, or reduce your other benefits, but can&rsquo;t decrease your rate of pension accrual while you&rsquo;re employed.&rdquo;</p>
<p>This so-called &ldquo;California rule&rdquo; is restricting the pension reforms that can be implemented in the state. Volokh concludes we will eventually need to treat &ldquo;pension benefits just like other aspects of compensation: as something earned over time and not guaranteed for the future.</p>
<p>&ldquo;In addition to being more rational as a public-employee compensation policy, abandoning the California rule would also give governmental units in California, and wherever else the rule has been adopted, flexibility to deal with changing circumstances.&rdquo;</p>
<p>A large majority of public employees initially chose their line of work for altruistic reasons. They were drawn to the notion of serving the public and bettering their community. As public servants, they ought to be concerned for the financial health of our state.</p>
<p>They should be calling for public pension reform; if not for altruistic reasons, then in an effort to provide a level of sustainability and certainty in their golden years when they will need it most.</p>
<p>The looming black cloud of the pension crisis in California threatens the state&rsquo;s ability to serve taxpayers and provide retirement security to our public servants.</p>
<p>Public employees, taxpayers and lawmakers must come together to create compromises that maintain the spirit of the promises that have been made to government workers while removing the untenable fiscal burden that those very promises have placed on California taxpayers.</p>
<p><em>Pete Constant is a pension policy analyst at Reason Foundation. This article originally appeared in the <a href="http://www.ocregister.com/articles/pension-666121-public-california.html">Orange County Register</a>.</em></p>1014290@http://www.reason.orgFri, 19 Jun 2015 13:37:00 EDTpete.constant@reason.org (Pete Constant)How Will State Courts Rule on Pension Reforms? Pension Law Map Gives Guidancehttp://www.reason.org/blog/show/pension-reform-map
<p>The New Jersey Supreme Court <a href="http://www.judiciary.state.nj.us/opinions/supreme/A-55-14BurgosvState).pdf">recently upheld</a> payment reductions to the state's pension fund. A month before, the Illinois Supreme Court <a href="http://www.illinoiscourts.gov/opinions/supremecourt/2015/118585.pdf">rejected the state's pension reform efforts</a>. Both states have among the worst pension funding levels in the country, and Illinois is sinking faster than New Jersey. So what explains the different court rulings?</p>
<p>The answer in part is the states offer their public pensions different levels of protection. This <a href="http://www.governing.com/finance101/gov-pension-protections-state-by-state.html">interactive map</a> at&nbsp;Governing.com&nbsp;identifies the legal basis of pension protections in each state. State pension law limits the realm of reform options. Legislators are largely unfettered when it comes to making changes for future workers. However, pension reforms directed at current employees and retirees face substantial barriers.</p>
<p>In states that view public pensions as contracts, adjusting pensions for current workers and retirees is an uphill battle. The United States Constitution forbids states from making laws impairing contractual obligations, and many state constitutions have a similar prohibition. This makes altering pension benefits for current employees tough, though not impossible.</p>
<p>Determining whether modifications to contractually protected pensions are constitutional <a href="https://scholar.google.com/scholar_case?q=+U.S.+Trust+Co.+v.+New+Jersey,+431+U.S.+1,+17+(1977))&amp;hl=en&amp;as_sdt=2006&amp;case=15238053046927037053&amp;scilh=0">requires a three step inquiry</a>:</p>
<ol>
<li>Is there a contractual relationship?</li>
<li>Has the contractual relationship been substantially impaired? &nbsp;</li>
<li>Was the change reasonable and necessary to serve an important public purpose?</li>
</ol>
<p>The third inquiry is only needed if the first two inquiries are answered in the affirmative.</p>
<p>The answer to each question varies by state. Some states have held a contract is formed during the first day on the job while others have held a contract is formed only after the employee starts collecting retirement benefits. Concerning the second and third inquiries, pension law scholar Amy B. Monahan asserts, "[I]t is relatively easy to establish impairment of [a pension] contract, while it is quite difficult to establish that the impairment is reasonable and necessary to achieve an important public purpose. As a result, a contractual approach to public pension protection often significantly limits a state&rsquo;s pension reform options."</p>
<p>Turning to the New Jersey and Illinois cases, both states protect pensions under contract theory. The 2011 New Jersey pension law contained language declaring pension fund members have a "contractual right" to pension funding from the state, and the state's failure to provide funding "shall be deemed an impairment of the contractual right." However, the New Jersey Supreme Court held the law could not create a contractual right to pension payments because the state constitution's debt limitation clause requires voter approval of large, long-term financial obligations. The pension law exceeded the debt limitation clause's boundaries but was not voter approved. Therefore, no contract was formed meaning New Jersey is not required to make the pension fund payments as the law originally required.</p>
<p><em>The</em> <em>Wall Street Journal</em> <a href="http://www.wsj.com/articles/n-j-s-highest-court-favors-christie-administration-on-pension-payments-1433860848">claims</a> the court ruling may give reformers leverage in future negotiations under the premise that the state would fund pensions on the condition that benefits are reduced. It seems equally likely that reform efforts could be hindered by the decision. The decision reduces the state's credibility, and pension negotiations require tremendous bipartisan political goodwill that may be in short supply following the court ruling. This much is certain: New Jersey's long-term financial troubles will be exacerbated by the state's failure to properly fund its pensions.</p>
<p>On the other hand, the Illinois Constitution states public pensions are contracts. Hence, the <a href="http://www.illinoiscourts.gov/opinions/supremecourt/2015/118585.pdf">Illinois Supreme Court</a> had no difficulty finding a contractual relationship existed, so employees who commence work for the state can never have their benefits reduced, even in dire financial circumstances. The court held, "[A]ccepting the State&rsquo;s position that reducing retirement benefits is justified by economic circumstances would require that we allow the legislature to do the very thing the pension protection clause was designed to prevent it from doing."</p>
<p>Illinois pension benefits can only be reduced through a constitutional amendment, and Illinois Governor Bruce Rauner <a href="http://www.chicagotribune.com/news/local/politics/ct-illinois-pension-law-court-ruling-20150508-story.html#page=1">has proposed</a> seeking an amendment that would make pension reforms viable. Without reform, Illinois will be forced to slash services or raise taxes to pay for pension benefits.</p>
<p>States that treat pensions as a property interest have a better chance at reforming pensions. Private property rights are secured by the United States Constitution and state constitutions. Property rights apply to what one already has, not prospective gains. Thus, states can modify future benefits but not previously accrued benefits.</p>
<p>Although litigation is likely to accompany a benefit change, the state has a much lower burden to meet under the property interest view of pensions than the contract view. Altering future benefits under the property approach requires:&nbsp;</p>
<ol>
<li>No individual be deprived of a fundamental right.</li>
<li>The state not act in a manner so "arbitrary and outrageous" that the conduct "shocks the conscience."</li>
</ol>
<p>Connecticut is a state that considers pensions a property interest. A federal court in the state <a href="https://scholar.google.com/scholar_case?q=Walker+v.+City+of+Waterbury,+601+F.+Supp.2d+420&amp;hl=en&amp;as_sdt=2006&amp;case=10030966094380644751&amp;scilh=0#r[2]">ruled that</a> vested firefighters were not exempt from negotiated benefit changes, including a benefit accrual reduction from 2.5 percent to 2 percent. The court held the firefighters "do not have a fundamental right to their vested pension benefits... ." Additionally, the benefit change was not "arbitrary, outrageous, or conscious-shocking" because the modification was reached through negotiation.</p>
<p>Texas and Indiana treat state pensions as gratuities, and the gratuity approach would seem to provide pensions protection more like a property interest than a contract. Minnesota affords public pensions protection under the doctrine of promissory estoppel meaning although public pensions are not themselves contracts, public pensions are enforced as contracts.</p>
<p>Regardless of how a state classifies its pensions, retired workers will almost certainly be exempt from benefit changes. If the pension is considered a contract, service during employment fulfilled the employee's end of the contract. This obligates the state to honor its end of the bargain. Similarly, retirees have already earned their benefits under the property interest approach. States have the ability to change retiree benefits with their &ldquo;police powers,&rdquo; but the change would have to pass a very high level of legal scrutiny.</p>
<p>Accordingly, states that treat pensions as a property interest have a better chance at bringing pension benefits to a sustainable level than states where pensions are considered contracts. Pension reformers in states that protect pensions as contracts should attempt to reclassify public pensions as a property interest, or at the very least, reduce the contractual protections to earned benefits only. Amending a state constitution is a colossal political effort and will require support from all segments of society. Nevertheless, pension fund solvency is an issue that affects all of a state's residents. Citizens of New Jersey and Illinois may be forced to take this drastic action to rein in their states' pension debts.</p>1014283@http://www.reason.orgWed, 17 Jun 2015 16:47:00 EDTadam.crepelle@reason.org (Adam Crepelle)Privatization Can Help Cover Costa Mesa's Rising Pension Costshttp://www.reason.org/news/show/privatization-can-help-cover-rising
Orange County Register <p>As the Register&rsquo;s Editorial Board recently noted, Costa Mesa&rsquo;s Pension Oversight Committee presented data to the City Council showing that the city&rsquo;s total annual payments to the pension system are going to skyrocket, rising from approximately $25 million this year to almost $40 million a year by 2030.</p>
<p>Even scarier, the analysis showed that pension costs are increasing at roughly twice the rate of overall city revenue (approximately 6.5 percent versus 3 percent, respectively).</p>
<p>The rising cost of government employee pensions in Costa Mesa has long been recognized as a major fiscal problem. In fact, the pension costs were a motivating factor behind the large-scale &ndash; and ultimately failed &ndash; attempts to privatize city services in recent years because pensions have been swallowing a growing share of the city budget and increasingly eating up spending that would go to public works, public safety, parks, libraries and other services citizens expect and rely on.</p>
<p>The city is spending more and more on a workforce that is no longer working, and citizens are getting fewer services as a result.</p>
<p>This trend will only continue to worsen for Costa Mesa residents, which is why privatization should remain a serious pursuit. In 2012 courts blocked a sweeping privatization initiative that would have contracted out 18 services performed by over 100 city employees.</p>
<p>Specifically, the Court of Appeal upheld a trial court&rsquo;s injunction against Costa Mesa&rsquo;s finding that the city did not properly confer with public employee unions on the proposed privatizations and that many of them would violate state laws restricting general law cities &ndash; those that do not operate under their own charter &ndash; from privatizing all but very specialized services like engineering, financial and accounting services.</p>
<p>After that, Costa Mesa did what it could, implementing some sensible proposals to privatize street sweeping and jail operations to cut costs (in part by getting union approval). It looks like the outsourcing of park maintenance to private companies may be next.</p>
<p>But the court rulings effectively took other opportunities to privatize things like building inspections, vehicle fleet maintenance, facility maintenance, street maintenance, animal control, information technology and employee benefit administration off the table unless unions agree to let them be privatized.</p>
<p>Ironically, by blocking privatization and fighting the city charter movement to protect current workers, unions are basically guaranteeing a long-term decline in the city workforce, since pension costs will increasingly squeeze out spending on the future workforce.</p>
<p>In a 2014 report to the City Council, the pension committee noted that the growing pension crisis was &ldquo;the single most compelling reason&rdquo; to privatize services, adding that &ldquo;if Costa Mesa cannot contain and manage its current and future costs, [it] should not exacerbate the problem for future generations by enrolling additional employees in [pension] plans.&rdquo;</p>
<p>The committee also helpfully anticipated an anti-privatization argument by refuting the idea that you would need more workers paying into the system in the future to pay off current unfunded pension liabilities. The city&rsquo;s over $200 million unfunded pension liability is debt that has to be paid off, &ldquo;which is not materially influenced by increases or decreases in city payroll.&rdquo;</p>
<p>Wholesale reforms to Costa Mesa&rsquo;s retirement systems are sorely needed and privatization certainly cannot solve the entire problem. Nonetheless, Costa Mesa may need to revisit its pursuit of charter city status, which would allow much more opportunity for city officials to privatize services to free up funds to cover rising pension costs.</p>
<p>Privatization can certainly play a significant role in covering the rising costs of pensions and reducing the &ldquo;crowd-out&rdquo; effect on other services. Otherwise, Costa Mesa&rsquo;s citizens are looking at a future where they pay more and more to the city, only to get less and less back in terms of city services.&nbsp;</p>
<p><em>Leonard Gilroy is director of government reform at Reason Foundation. This article originally appeared in the <a href="http://www.ocregister.com/articles/city-663587-pension-costa.html">Orange County Register</a>.</em></p>1014275@http://www.reason.orgMon, 08 Jun 2015 14:44:00 EDTleonard.gilroy@reason.org (Leonard Gilroy)New California Pension Initiative Announced: Voter Empowerment Act of 2016http://www.reason.org/blog/show/the-voter-empowerment-act-of-2016
<p>A bipartisan coalition of politicians and business people, led by former San Jose Mayor Chuck Reed and former San Diego Councilmember Carl DeMaio, filed a pension reform ballot initiative with the California Secretary of State today.</p>
<p>Unlike many other efforts targeting pension reform, this initiative does not dictate how various government agencies approach their own, unique circumstances, instead requiring that local voters approve of the pension benefits being promised to any new employees.</p>
<p>While not impacting current employees or retirees, the Voter Empowerment Act of 2016 would give voters the right to approve, <em>or reject,</em> the compensation and retirement benefit promises made to new employees, as well as requiring voter approval before pension benefits are enhanced for any current or future employee. The proposed state constitutional amendment covers the retirement benefits offered by <em>all</em> state and local government agencies, including the state itself, cities, counties, school districts, the University of California and California State University systems, and special districts.&nbsp;</p>
<p>Additionally, the initiative requires that government agencies pay no more than 50% of the total cost of retirement benefits &ndash; including any future unfunded liabilities &ndash; unless the voters explicitly approve otherwise. Employees would be required to contribute the balance of the cost. This is an important element of the initiative because equal cost sharing equates to equal risk sharing. This stands in stark contrast to the status quo, in which all risk and debt liabilities are transferred to the taxpayers.</p>
<p>Some government agencies may want to continue to provide future employees the level of pension benefits now offered to current employees, including unequal cost sharing - and they can, as long as voters explicitly approve these benefits.</p>
<p>If an agency finds that their voting residents don&rsquo;t approve of a defined benefit plan for new employees, the act allows those agencies to use the collective bargaining process to agree on other types of retirement benefits, potentially including the 401(k)-style defined contribution plans already being offered by CalPERS, CalSTRS and other pension plan providers, without voter approval.&nbsp;</p>
<p>Although this initiative does not address the nearly $200 billion in unfunded liabilities that currently exist in California, it does prevent retirement boards from levying termination fees or other discriminatory conditions against agencies that close defined benefit pension plans to new employees. These exorbitant costs have been a significant barrier to reform for many government agencies struggling to meet their pension obligations.&nbsp;</p>
<p>This initiative provides a method for elected officials to address their community&rsquo;s specific circumstances through the collective bargaining process and allows voters to ratify the agreements, while steering clear of the <a href="http://reason.org/news/show/overprotecting-public-employee-pens">vested rights doctrine</a> that has stymied reform previous reform efforts in California and a number of other states. By focusing on future employees, this initiative should avoid significant legal challenges leading to tangible results for struggling agencies throughout the state. Moreover, it provides for crucial voter control rather than the than the typical politician/union dynamic that has led to unsustainable spiraling benefits and costs.</p>
<p>Read the Voter Empowerment Act of 2016 <a href="http://carldemaio.com/sites/default/files/Pension%20Initiative%206-2-15.pdf">here</a>.<br />Read the Voter Empowerment Act of 2016 press release <a href="http://nebula.wsimg.com/c271e5a2bbe511fa4bf8cd51c898a8ed?AccessKeyId=22507A69F36DDBB263CD&amp;disposition=0&amp;alloworigin=1">here</a>.</p>1014273@http://www.reason.orgThu, 04 Jun 2015 14:47:00 EDTpete.constant@reason.org (Pete Constant)Pension Reform Newsletter - May 2015http://www.reason.org/news/show/pension-reform-newsletter-may-2015
<p><a name="OLE_LINK2"></a><a name="OLE_LINK1"></a><em>This newsletter highlights articles, research, opinion, and other information related to public pension problems and reform efforts across the nation. To find previous editions, please visit <a href="http://reason.org/newsletters/pensionreform/">http://reason.org/newsletters/pensionreform/</a>.</em></p>
<p><strong>Articles, Research &amp; Spotlights&nbsp;</strong></p>
<ul>
<li>Illinois&rsquo; Pension Reforms Struck Down by State&rsquo;s Top Court</li>
<li>Moody&rsquo;s Downgrades Chicago&rsquo;s Debt to Junk Status in Wake of Illinois&rsquo;s Ruling</li>
<li>San Bernardino Bankruptcy: Bondholders Lose against CalPERS</li>
<li>Can&nbsp;Public&nbsp;Pensions&nbsp;Fulfill&nbsp;Their&nbsp;Promises?&nbsp;An Examination of Pennsylvania&rsquo;s Two Largest Public Pensions</li>
<li>How Will Longer Lifespans Affect State and Local Pension Funding?</li>
<li>Research Groups Launched Comprehensive Public Plans Data Resource</li>
</ul>
<p><strong>Quotable Quotes on Pension Reform</strong></p>
<p><strong>Pension Reform Handbook</strong></p>
<p><strong>Contact the Pension Reform Help Desk </strong></p>
<p><strong>&nbsp; &nbsp; &nbsp; &nbsp; &nbsp;</strong>&nbsp;</p>
<p><strong>Articles, Research &amp; Spotlights</strong></p>
<p><strong>Illinois&rsquo; Pension Reforms Struck Down by State&rsquo;s Top Court<br /> <em>By Scott Shackford, via Reason.com</em></strong><br /> <br /> Illinois' massive pension crisis, arguably the worst in the nation, is about to probably get worse. On May 8, the state&rsquo;s Supreme Court unanimously ruled that efforts to tamp down on the crisis by scaling back workers benefits are a violation of the state&rsquo;s constitution. A provision in the state constitution states that benefits for government employees cannot be "diminished or impaired."<br /> <br /> The pension reforms Illinois enacted in 2013 to try to rein in its unfunded liabilities and more than $100 billion in debt involved curbing cost of living increases and putting a cap on how much of an employee&rsquo;s salary may be used to calculate pension payments. The court determined these reforms count as diminishing or impairing benefits. <br /> <br /> Justice Robert Karmeier rejected the argument that economic necessity overrides the constitution&rsquo;s pension protections:</p>
<p>&nbsp;</p>
<p style="padding-left: 30px;">"Our economy is and has always been subject to fluctuations, sometimes very extreme fluctuations. [But] the law was clear that the promised benefits would therefore have to be paid and that the responsibility for providing the state's share of the necessary funding fell squarely on the legislature&rsquo;s shoulders. The General Assembly may find itself in crisis, but it is a crisis which other public pension systems managed to avoid and&hellip; it is a crisis for which the General Assembly itself is largely responsible.&rdquo; &ndash; Karmeier wrote.</p>
<p>&nbsp;</p>
<p>Both the state and government employees themselves have a very long history of skipping pension payments. The judge even criticized them for failing to keep a temporary tax hike from 2011 to bring in more revenue to the state. But John Tillman, CEO of the free-market, pension-reform-oriented Illinois Policy Institute, took a <a href="https://www.illinoispolicy.org/illinois-supreme-court-strikes-down-2013-pension-law/">dim view</a> of Karmeier&rsquo;s call to raise taxes to fix this problem. <br /> <br /> To read more about the issue, go <a href="http://reason.com/blog/2015/05/08/illinois-pension-reforms-struck-down-by">here</a>.</p>
<p><strong>Moody&rsquo;s Downgrades Chicago&rsquo;s Debt to Junk Status in Wake of Illinois&rsquo;s Ruling<br /></strong><em><strong>By Truong Bui, Reason Foundation</strong></em></p>
<p>&nbsp;</p>
<p>Moody&rsquo;s on May 12 <a href="https://www.moodys.com/research/Moodys-downgrades-Chicago-IL-to-Ba1-affecting-89B-of-GO--PR_325213">downgraded</a> Chicago&rsquo;s debt to junk status. Specifically, the rating company downgraded the city&rsquo;s $8.1 billion of general obligation debt; $542 million of sales tax revenue debt; and $268 million of authorized motor fuel tax revenue debt from Baa2 to Ba1.</p>
<p>&nbsp;</p>
<p>One of the key rationales for the downgrade is the &ldquo;expected growth in the city's highly elevated unfunded pension liabilities&rdquo;. Moody&rsquo;s notes that this factor is exacerbated by the Illinois Supreme Court&rsquo;s <a href="http://reason.com/blog/2015/05/08/illinois-pension-reforms-struck-down-by">recent overturning</a> of the state&rsquo;s pension reforms enacted in 2013, since the ruling implies that the city has few options to rein in the growth in its unfunded pension liabilities. Moody&rsquo;s expects that &ldquo;the costs of servicing Chicago's unfunded liabilities will grow, placing significant strain on the city's financial operations absent commensurate growth in revenue and/or reductions in other expenditures.&rdquo; In fact, contribution to the city&rsquo;s Police and Fire pension plans will increase by 179 percent in 2016. As a result, the rating company places a negative outlook on the city&rsquo;s debt.</p>
<p>&nbsp;</p>
<p>Among the things that could improve the debt ratings, according to Moody&rsquo;s, are halting the growth in the unfunded liabilities, and revenue growth and/or reductions in other operating expenses that could help easing the pension cost pressure. On the other hand, continued growth in the pension debt or a court&rsquo;s ruling the current statute governing the city&rsquo;s pension plans unconstitutional could worsen the ratings.</p>
<p>&nbsp;</p>
<p>To read more about the Moody&rsquo;s decision, go <a href="https://www.moodys.com/research/Moodys-downgrades-Chicago-IL-to-Ba1-affecting-89B-of-GO--PR_325213">here</a>.</p>
<p>&nbsp;</p>
<p><strong>San Bernardino Bankruptcy: Bondholders Lose against CalPERS<br /></strong><em><strong>By Truong Bui, Reason Foundation</strong></em></p>
<p>&nbsp;</p>
<p>On May 11, US Bankruptcy Judge Meredith Jury <a href="http://www.reuters.com/article/2015/05/11/usa-california-sanbernardino-idUSL1N0Y231320150511">dismissed</a> an attempt by pension bond investors to win the same treatment received by the California Public Employees&rsquo; Retirement System (CalPERS) in the San Bernardino bankruptcy. The city declared bankruptcy in 2012, with a $45 million deficit. <br /> <br /> Luxembourg-based Erste Europ&auml;ische Pfandbrief-und Kommunalkreditbank AG (EEPK), which holds $50 million of pension obligation bonds issued by the city in 2005, argued that because bond proceeds were used to pay the pension liability, those bonds should be treated as if they were pension debts owed to CalPERS. The judge rejected this line of reasoning, contending that there was no evidence that the city intended to treat the two kinds of debts the same way. The rationale is that while CalPERS has the ability to reduce pension payments to the city&rsquo;s employees if the pension debts are not paid, bondholders simply don&rsquo;t have this power.</p>
<p>&nbsp;</p>
<p>The ruling facilitates the city&rsquo;s plan to repay its pension bondholders only <a href="http://www.reuters.com/article/2015/05/14/us-usa-bankruptcy-sanbernardino-idUSKBN0NZ2LP20150514">a penny on the dollar</a>, in contrast to full payments to CalPERS. The city&rsquo;s action is consistent with a broader pattern found in the bankruptcies of Stockton, California, and Detroit, Michigan, where bondholders received little of what they were owned, while pensions were left unscathed.</p>
<p>&nbsp;</p>
<p>To read more about the issue, go <a href="http://www.bloomberg.com/news/articles/2015-05-12/calpers-pension-hammer-forces-unfair-bond-ruling-by-judge">here</a> and <a href="http://www.reuters.com/article/2015/05/14/us-usa-bankruptcy-sanbernardino-idUSKBN0NZ2LP20150514">here</a>.</p>
<p>&nbsp;</p>
<p>&nbsp;</p>
<p><strong>Can&nbsp;Public&nbsp;Pensions&nbsp;Fulfill&nbsp;Their&nbsp;Promises?&nbsp;An Examination of Pennsylvania&rsquo;s Two Largest Public Pensions<br /></strong><em><strong>By Truong Bui, Reason Foundation</strong></em></p>
<p>&nbsp;</p>
<p><a name="OLE_LINK4"></a><a name="OLE_LINK3"></a>A <a href="http://mercatus.org/sites/default/files/Elder-PA-Public-Pensions.pdf">recent study</a> by Erick Elder and Gary Wagner at the Mercatus Center, George Mason University, examines the nexus between investment returns and pension funding levels for Pennsylvania&rsquo;s two largest public pension plans, Pennsylvania&rsquo;s Public School Employees&rsquo; Retirement System (PSERS) and the State Employees&rsquo; Retirement System (SERS). Having assets of more than $75 billion, the two plans are unfunded by as much as $100 billion under market valuation.</p>
<p>&nbsp;</p>
<p>The study finds that while the two plans have a 100 percent probability of having sufficient assets to pay benefits without increasing contributions for the next five years, the probability drops after the five-year period. In 15 years from now, PSERS and SERS will have only a 31 percent chance and a 16 percent chance, respectively, of sufficient funding. In 50 years, the probabilities are only 4 percent for PSERS and 1.5 percent for SERS.</p>
<p>&nbsp;</p>
<p>Based on financial modeling for the two plans, the study illustrates key ideas applicable to all public pension plans:</p>
<p>- Investment return volatility implies a high chance that even fully funded plans may have insufficient assets to cover their future benefit obligations.<br />- A proper discount rate should reflect the riskiness of future pension liabilities, not the expected returns of pension assets.<br />- Overfunding pensions can lead to political pressure for benefit increases.</p>
<p>&nbsp;</p>
<p>To read the full study, go <a href="http://mercatus.org/sites/default/files/Elder-PA-Public-Pensions.pdf">here</a>.</p>
<p>&nbsp;</p>
<p><strong>How Will Longer Lifespans Affect State and Local Pension Funding?<br /></strong><em><strong>By Truong Bui, Reason Foundation</strong></em></p>
<p>&nbsp;</p>
<p><a name="OLE_LINK10"></a><a name="OLE_LINK7"></a><a name="OLE_LINK6"></a><a name="OLE_LINK5"></a>Accurate estimates of lifespans play an important role in pension funding. As longer lifespans mean larger pension benefits, underestimation of workers&rsquo; life expectancy may cause insufficient funding. For example, a revision of longevity assumptions in 2014 reduced CalPERS&rsquo;s funded ratio by five percentage points. A <a href="http://slge.org/publications/how-will-longer-lifespans-affect-state-and-local-pension-funding">recent study</a> by Alicia Munnell and others at the Center for State and Local Government Excellence explores the funding challenges faced by public pensions due to longevity improvement.</p>
<p>&nbsp;</p>
<p><a name="OLE_LINK9"></a><a name="OLE_LINK8"></a>Using data from 150 state and local pension plans, the study analyzes how differences in life expectancy affect public plans&rsquo; funded status. It finds that if public plans adopted the new mortality table that private plans are legally required to use, the public plans&rsquo; estimated life expectancy would increase by 0.5 years, decreasing the average funded ratio from 73 percent to 72 percent. However, if public plans used the generational method, which incorporates anticipated future longevity improvements, the life expectancy increase would be 2.3 years, dropping the funded ratio to 67 percent.</p>
<p>&nbsp;</p>
<p>Additionally, the analysis reveals that using the new mortality data causes the biggest decline in funded ratios for the smallest plans, and that worse funded plans tend to use more outdated longevity assumptions.</p>
<p>&nbsp;</p>
<p>To read the full study, go <a href="http://slge.org/publications/how-will-longer-lifespans-affect-state-and-local-pension-funding">here</a>.</p>
<p>&nbsp;</p>
<p><strong>Research Groups Launched Comprehensive Public Plans Data Resource<br /></strong><em><strong>By Truong Bui, Reason Foundation</strong></em></p>
<p>&nbsp;</p>
<p><a name="OLE_LINK13"></a><a name="OLE_LINK12"></a>Looking for pension data may often be arduous and time-consuming. Fortunately, a <a href="http://www.publicplansdata.org">recently launched website</a> provides easy access to comprehensive data on 150 state and local pension plans in the US. The site is the product of a joint effort by the Center for Retirement Research at Boston College (CRR), the Center for State and Local Government Excellence (SLGE), and the National Association of State Retirement Administrators (NASRA).</p>
<p>&nbsp;</p>
<p>One can find on the website a complete data set covering all the key pension variables, including funding levels, contributions, plan expenses, investment returns, asset allocation, plan provisions, and many others. The site also provides interactive tools for users to select specific plans, variables, and graphs. For example, one can quickly generate a graph detailing the annual required contributions (ARC) over the last decade for the State Employees&rsquo; Retirement System of Illinois, and see how those required contributions compare to the US average ARC as a percentage of payroll.</p>
<p>&nbsp;</p>
<p>In addition, users can download comprehensive annual financial reports and actuarial valuations directly from the site.</p>
<p>&nbsp;</p>
<p>To access the website, go <a href="http://www.publicplansdata.org">here</a>.</p>
<p><strong>&nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;&nbsp;</strong></p>
<p><strong>Quotable Quotes</strong><strong> on Pension Reform</strong></p>
<p>"Our economy is and has always been subject to fluctuations, sometimes very extreme fluctuations. [But] the law was clear that the promised benefits would therefore have to be paid and that the responsibility for providing the state's share of the necessary funding fell squarely on the legislature&rsquo;s shoulders. The General Assembly may find itself in crisis, but it is a crisis which other public pension systems managed to avoid and&hellip; it is a crisis for which the General Assembly itself is largely responsible.&rdquo;<br /> <em>- </em><a href="http://www.chicagotribune.com/news/local/politics/ct-illinois-pension-law-court-ruling-20150508-story.html#page=1"><em>Lloyd&nbsp;Karmeier, fifth district justice on the Illinois Supreme Court</em></a></p>
<p>"Basically the court is saying you can solve it, but the only way you can solve it is by throwing more money at it, and that's just not in the cards. The real issue is we're talking about amounts of money no taxing and revenue gets close to, in what's available to us, so there really needs to be a rethinking in how this gets done. So, it's going to be an interesting year."<br /><em>- </em><a href="http://www.chicagotribune.com/news/local/politics/ct-illinois-pension-rahm-emanuel-met-20150508-story.html#page=1"><em>Patrick O'Connor, Chicago City Council floor leader</em></a></p>
<p>&nbsp;</p>
<p>&ldquo;This action by Moody&rsquo;s is not only premature, but it is irresponsible to play politics with Chicago&rsquo;s financial future by pushing the City to increase taxes on residents without reform.&rdquo;<br /><em>- </em><a href="http://www.cityofchicago.org/city/en/depts/mayor/press_room/press_releases/2015/may/statement-from-mayor-rahm-emanuel-on-moodys-downgrade.html"><em>Rahm Emanuel, Mayor of Chicago</em></a></p>
<p>&nbsp;</p>
<p>&ldquo;You can&rsquo;t blame &ldquo;Wall Street&rdquo; for the financial challenges facing pension funds, yet demand benefits based on financial assumptions that only those you taint as Wall Street charlatans are willing to promote.&rdquo;<br /> <em>- </em><a href="http://www.foxandhoundsdaily.com/2015/05/pension-reformers-are-not-the-enemy-of-public-safety/"><em>Ed Ring, Executive Director, California Policy Center</em></a></p>
<p>&nbsp;</p>
<p>&ldquo;The borrowing is taking the pressure off politicians from actually facing the actual reforms that need to happen on these pension systems. You&rsquo;ve got a situation where the system is no longer sustainable, whether it&rsquo;s New Jersey or Illinois.&rdquo;<br /><em>- </em><a href="http://www.psmag.com/business-economics/you-cant-borrow-your-way-out-of-a-major-pension-crisis"><em>Ted&nbsp;Dabrowski,&nbsp;Vice&nbsp;President&nbsp;of&nbsp;policy, Illinois&nbsp;Policy&nbsp;Institute</em></a></p>
<p>&nbsp;</p>
<p>&ldquo;This isn&rsquo;t how we think our education dollars are being spent. We&rsquo;re told the money is going into the classrooms and, increasingly, it&rsquo;s not.&rdquo;<br /><em>- </em><a href="http://www.thereporter.com/general-news/20150504/hundreds-of-retired-educators-bag-hefty-pensions-including-several-from-solano-county"><em>Mark Bucher, President, California Policy Center</em></a></p>
<p><strong> &nbsp; &nbsp; &nbsp;</strong></p>
<p><strong>Pension Reform Handbook</strong></p>
<p>For those interested in the process and mechanics of pension reform, Lance Christensen and Adrian Moore published a <a href="http://reason.org/news/show/pension-reform-handbook-a-starter-g">comprehensive starter guide</a> for state and local reformers. This handbook aims to capture the experience of policymakers in those jurisdictions that have paved the way for substantive reform, and bring together the best practices that have emerged from their reform efforts, as well as the important lessons learned.</p>
<p>&nbsp;</p>
<p>To access the handbook, go <a href="http://reason.org/news/show/pension-reform-handbook-a-starter-g">here</a>.</p>
<p><strong> &nbsp; &nbsp; &nbsp; &nbsp;&nbsp;</strong>&nbsp;</p>
<p><a name="14307d1cd3998348_Contact"></a><strong>Contact</strong><strong>&nbsp;</strong><strong>the Pension Reform Help Desk</strong></p>
<p>&nbsp;</p>
<p>Reason Foundation set up a Pension Reform Help Desk to provide information on Reason's work on pension reform and resources for those wishing to pursue pension reform in their states, counties, and cities. Feel free to contact the Reason Pension Reform Help Desk by e-mail at <a href="mailto:pensionhelpdesk&#64;reason.org?subject=Pension+Help+Desk">pensionhelpdesk&#64;reason.org</a>.</p>
<p>***</p>
<p>Follow the discussion on pensions and other governmental reforms at&nbsp;<a href="http://click.email.reason.org/?qs=237a0cea2d3615182558b8792174225278fa939c418f187d93140f726029c1b058b3938f702b70ba">Reason Foundation's website</a>&nbsp;or on&nbsp;Twitter <a href="http://click.email.reason.org/?qs=237a0cea2d361518ec3286bbf457be34f5a2576cd03b51aaf3f705a260a38f9a37fc9742147e9e55">&#64;ReasonReform</a>. As we continually strive to improve the publication, please feel free to send your questions, comments and suggestions to <a href="mailto:adrian.moore&#64;reason.org?subject=Newsletter">adrian.moore&#64;reason.org</a>.</p>
<p><strong><em>Adrian Moore<br /></em></strong><strong><em>Vice President, Policy<br /></em></strong><strong><em>Reason Foundation</em></strong></p>1014265@http://www.reason.orgFri, 22 May 2015 03:21:00 EDTadrian.moore@reason.org (Adrian Moore)Research Groups Launched Comprehensive Public Plans Data Resourcehttp://www.reason.org/blog/show/research-groups-launched-comprehens
<p><a name="OLE_LINK13"></a><a name="OLE_LINK12"></a>Looking for pension data may often be arduous and time-consuming. Fortunately, a <a href="http://www.publicplansdata.org">recently launched website</a> provides easy access to comprehensive data on 150 state and local pension plans in the US. The site is the product of a joint effort by the Center for Retirement Research at Boston College (CRR), the Center for State and Local Government Excellence (SLGE), and the National Association of State Retirement Administrators (NASRA).</p>
<p>One can find on the website a complete data set covering all the key pension variables, including funding levels, contributions, plan expenses, investment returns, asset allocation, plan provisions, and many others. The site also provides interactive tools for users to select specific plans, variables, and graphs. For example, one can quickly generate a graph detailing the annual required contributions (ARC) over the last decade for the State Employees&rsquo; Retirement System of Illinois, and see how those required contributions compare to the US average ARC as a percentage of payroll.</p>
<p>In addition, users can download comprehensive annual financial reports and actuarial valuations directly from the site.&nbsp;</p>
<p>To access the website, go <a href="http://www.publicplansdata.org">here</a>.</p>1014264@http://www.reason.orgFri, 22 May 2015 03:15:00 EDTtruong.bui@reason.org (Truong Bui)Longevity Assumptions Affect Pension Fundinghttp://www.reason.org/blog/show/longevity-assumptions-affect-pensio
<p><a name="OLE_LINK10"></a><a name="OLE_LINK7"></a><a name="OLE_LINK6"></a><a name="OLE_LINK5"></a>Accurate estimates of lifespans play an important role in pension funding. As longer lifespans mean larger pension benefits, underestimation of workers&rsquo; life expectancy may cause insufficient funding. For example, a revision of longevity assumptions in 2014 reduced CalPERS&rsquo;s funded ratio by five percentage points. A <a href="http://slge.org/publications/how-will-longer-lifespans-affect-state-and-local-pension-funding">recent study</a> by Alicia Munnell and others at the Center for State and Local Government Excellence explores the funding challenges faced by public pensions due to longevity improvement.</p>
<p><a name="OLE_LINK9"></a><a name="OLE_LINK8"></a>Using data from 150 state and local pension plans, the study analyzes how differences in life expectancy affect public plans&rsquo; funded status. It finds that if public plans adopted the new mortality table that private plans are legally required to use, the public plans&rsquo; estimated life expectancy would increase by 0.5 years, decreasing the average funded ratio from 73 percent to 72 percent. However, if public plans used the generational method, which incorporates anticipated future longevity improvements, the life expectancy increase would be 2.3 years, dropping the funded ratio to 67 percent.</p>
<p>Additionally, the analysis reveals that using the new mortality data causes the biggest decline in funded ratios for the smallest plans, and that worse funded plans tend to use more outdated longevity assumptions.</p>
<p>To read the full study, go <a href="http://slge.org/publications/how-will-longer-lifespans-affect-state-and-local-pension-funding">here</a>.</p>1014263@http://www.reason.orgFri, 22 May 2015 02:59:00 EDTtruong.bui@reason.org (Truong Bui)The Probability of Fulfilling Pension Promises: Pennsylvania's Illustrationhttp://www.reason.org/blog/show/the-probability-of-fulfilling-pensi
<p>A <a href="http://mercatus.org/sites/default/files/Elder-PA-Public-Pensions.pdf">recent study</a> by Erick Elder and Gary Wagner at the Mercatus Center, George Mason University, examines the nexus between investment returns and pension funding levels for Pennsylvania&rsquo;s two largest public pension plans, Pennsylvania&rsquo;s Public School Employees&rsquo; Retirement System (PSERS) and the State Employees&rsquo; Retirement System (SERS). Having assets of more than $75 billion, the two plans are unfunded by as much as $100 billion under market valuation.&nbsp;</p>
<p>The study finds that while the two plans have a 100 percent probability of having sufficient assets to pay benefits without increasing contributions for the next five years, the probability drops after the five-year period. In 15 years from now, PSERS and SERS will have only a 31 percent chance and a 16 percent chance, respectively, of sufficient funding. In 50 years, the probabilities are only 4 percent for PSERS and 1.5 percent for SERS.</p>
<p>Based on financial modeling for the two plans, the study illustrates key ideas applicable to all public pension plans:</p>
<p>- Investment return volatility implies a high chance that even fully funded plans may have insufficient assets to cover their future benefit obligations.<br />- A proper discount rate should reflect the riskiness of future pension liabilities, not the expected returns of pension assets.<br />- Overfunding pensions can lead to political pressure for benefit increases.&nbsp;</p>
<p>To read the full study, go <a href="http://mercatus.org/sites/default/files/Elder-PA-Public-Pensions.pdf">here</a>.&nbsp;</p>1014262@http://www.reason.orgFri, 22 May 2015 02:49:00 EDTtruong.bui@reason.org (Truong Bui)Pension Reform Newsletter - April 2015http://www.reason.org/news/show/pension-reform-newsletter-april-15
<p><em>This newsletter highlights articles, research, opinion, and other information related to public pension problems and reform efforts across the nation. To find previous editions, please visit <a href="http://reason.org/newsletters/pensionreform/">http://reason.org/newsletters/pensionreform/</a>.&nbsp;</em></p>
<p><strong>Articles, Research &amp; Spotlights&nbsp;</strong></p>
<ul>
<li>Governance &amp; Decision-Making in Underfunding of Public Sector Pension Plans</li>
<li>Testimony on Nevada Assembly Bill 190</li>
<li>A Response to the Defense of Status Quo for Failing Pension Systems</li>
<li>Unions Need to Make a Deal on Retirement Benefits</li>
<li>California Crowd-Out&nbsp;</li>
<li>Reforming Alabama's Retirement System</li>
<li>GASB Changes Hit Public Pension Plans</li>
<li>Why Pre-fund? Why Fully Fund?</li>
<li>Website for Government Workers to Learn about 401(k)s&nbsp;</li>
<li>Updated Pension Gimmicks List</li>
</ul>
<p><strong>Quotable Quotes on Pension Reform</strong></p>
<p><strong>Pension Reform Handbook</strong></p>
<p><strong>Contact the Pension Reform Help Desk</strong><strong>&nbsp;</strong></p>
<p>&nbsp;<strong> &nbsp; &nbsp;&nbsp;</strong></p>
<p><strong>Articles, Research &amp; Spotlights</strong></p>
<p><strong>Governance</strong><strong> &amp; Decision-Making in Underfunding of Public Sector Pension Plans<br /></strong><em><strong>By Pete Constant, Reason Foundation</strong></em></p>
<p>&nbsp;</p>
<p>Cities and states throughout our country are struggling to meet the financial demands of skyrocketing public employee pension contributions. Forward-looking projections of contribution rates reveal little to no relief for many years to come. And while this crisis has prompted government agencies at all levels to call for reform of the public pension systems, the question remains - will these proposed reforms fix the problem?&nbsp;</p>
<p>&nbsp;</p>
<p>Recent research suggests that investment returns played only a minor role in the current underfunding and that behavioral issues might be more significant than previously thought. Reformers may want to look at the roots of structural governance issues in the traditional make-up of pension boards that approve the assumptions that are used to create their forecasts.</p>
<p>&nbsp;</p>
<p>To read the full commentary on the impact of pension boards in investment projections and funding decisions, go <a href="http://click.email.reason.org/?qs=237a0cea2d3615189f84e2c703c95d3ca81f9b1a0db52171b97aedba47b92641ea1fee28eaf1a9ef">here</a>.</p>
<p>&nbsp;</p>
<p>&nbsp;</p>
<p><strong>Testimony</strong><strong> on Nevada Assembly Bill 190<br /></strong><em><strong>By Anthony Randazzo, Reason Foundation</strong></em></p>
<p>The state of Nevada is considering a substantive change to its public sector pension system. <a href="http://click.email.reason.org/?qs=237a0cea2d36151873a9ea114592afb41712a853c97f859d4bccdc8a8417c27994f5f3cb269ed3bf">Assembly Bill 190</a>, by Assemblyman Randy Kirner, a bill currently being considered in the state assembly, would introduce for new employees a hybrid pension plan while leaving current employees alone.</p>
<p>In consultation with <a href="http://click.email.reason.org/?qs=237a0cea2d361518abf6a8b9d817fb5578b6b25ad0268c955a3cec90b8130a7f923d94ad39097935">The Terry Group </a>, Reason developed a forecast for how the legislation would change Nevada's fiscal position, taxpayer risks, and member benefits. We presented our findings in a hearing on April 15, 2015 before the Nevada Assembly Committee on Ways and Means.&nbsp;</p>
<p>Our actuarial model of <a href="http://click.email.reason.org/?qs=237a0cea2d361518859b96fcd806a662485918b593d794e0a43e70f525aea19d4b114823a2bbae9c">Public Employees' Retirement System of Nevada</a>, and forecasting of how AB 190 would change the baseline, yielded three key findings:&nbsp;</p>
<ol>
<li>AB 190 will create savings for total employer cost, $14 million in year one and around $2.4 billion over 20 years;&nbsp;</li>
<li>AB 190 will mitigate risks to taxpayers by replacing part of the defined-benefit liabilities with a fixed employer cost defined-contribution benefit; and&nbsp;</li>
<li>AB 190 will provide comparable benefits to the status quo, assuming the DC accounts and DB plan earn the assumed 8 percent return.&nbsp;</li>
</ol>
<p>To read the complete testimony and see accompanying graphs, go <a href="http://click.email.reason.org/?qs=237a0cea2d3615184ce0f3b5368648d804076b07b778983588b2ec63d7606f110fa63a907e9cb880">here</a>.&nbsp;</p>
<p>&nbsp;&nbsp;</p>
<p><strong>A</strong><strong> Response to the Defense of Status Quo for Failing Pension Systems<br /></strong><em><strong>By Lance Christensen and Truong Bui, Reason Foundation</strong></em></p>
<p>&nbsp;</p>
<p>Opponents of pension reform in Nevada seem unwilling to admit that the system is broken and that its significant unfunded liabilities will impair state and local governments' ability to provide basic programs and essential services for citizens. Rather than engage in constructive dialogue about the appropriate reform steps to take, they would rather deflect discussion and hope for some economic miracle or tax increase that will put billions of dollars more into a system that is critically ill. Here are <a href="http://click.email.reason.org/?qs=237a0cea2d361518e1166de6c8b4c4f100480c9a0d8f98f7ab52c2d88e83ae992fb7bd18f6063ec3">some responses </a>to a sampling of statements made by Teresa Ghilarducci, a national advocate of defined benefit pensions, in a <a href="http://click.email.reason.org/?qs=237a0cea2d361518017ee964f8f7547d5acc977ee204b53da803bffda910281c7314bac712d2fc8a">recent <em>Las Vegas Review-Journal </em>op-ed</a>.&nbsp;</p>
<p>&nbsp;</p>
<p>In the end, both the taxpayers and those who have served Nevada in local and state government jobs deserve to understand the full context of the debate before them so that they are better informed about the needs and pathways to pension reform. Reform proposals before the legislature keep the promises made to those already in the system without increasing the debt on future generations. Further, policymakers acknowledge that Nevada needs a retirement system that is transparent, affordable, sustainable and secure for a changing workforce and future generations.&nbsp;</p>
<p>&nbsp;</p>
<p>To read the full commentary, go <a href="http://click.email.reason.org/?qs=237a0cea2d361518fe4df30ee89cf1cc95fd0004cfa5eed62327f6507ea2b98d551eaef95590b128">here</a>.&nbsp;</p>
<p>&nbsp;</p>
<p>&nbsp;</p>
<p><strong>Unions</strong><strong> Need to Make a Deal on Retirement Benefits<br /></strong><em><strong>By Lance Christensen, Reason Foundation</strong></em></p>
<p>&nbsp;</p>
<p>California taxpayers are saddled with unfunded public pension liabilities estimated to be as high as $583 billion, but often overlook that they're also on the hook for billions more in retiree health care benefits. In his January 2015 budget proposal, Gov. Jerry Brown acknowledged that unfunded liabilities for retiree health care costs for state employees now stand at $72 billion and will increase to $90 billion if nothing is done.</p>
<p>&nbsp;</p>
<p>The tab for taxpayers is higher when factoring in health care benefits for local government retirees. In estimating the costs for both state and local government workers, the nonprofit California Common Sense found an unfunded retiree health care liability of $157.7 billion.</p>
<p>&nbsp;</p>
<p>Annual spending from the state's general fund to pay down this debt has more than quadrupled, from $458 million in 2001 to $1.9 billion this fiscal year, but that is still not enough to meet the costs. And, with the average Californian's life expectancy now exceeding 80 years, the cost of health care benefits for public retirees will continue to grow.</p>
<p>&nbsp;</p>
<p>So what's the solution? To read more about the issue, go <a href="http://click.email.reason.org/?qs=237a0cea2d36151864594b216a94d350ea793c5c325f29b9824fa311abffe77382bdeff099969cb3">here</a>.</p>
<p>&nbsp;</p>
<p><strong>California</strong><strong> Crowd-Out&nbsp;<br /></strong><em><strong>By Lance Christensen, Reason Foundation</strong></em></p>
<p>&nbsp;</p>
<p>When pension costs increase, absent tax increases, significant changes to actuarial assumptions, prudent fiscal decisions or even substantive reform, other core governmental services are often negatively impacted through "crowd-out." In a recent in-depth study, <a href="http://click.email.reason.org/?qs=237a0cea2d3615181b87b22fe53439c558cb5ef30fa4a041b3a2d59eebedb5f1e029218468cbe6aa">"California Crowd-Out: How Rising Retirement Benefit Costs Threaten Municipal Services,"</a> Manhattan Institute senior fellow <a href="http://click.email.reason.org/?qs=237a0cea2d361518a0f3ef92c346e265eaafd91298629483a849cd842275784276480ad6fec700c9">Stephen D. Eide </a>writes, "Balanced budget requirements mandate that when costs grow more rapidly than revenues, something must give. All too often, this has meant reductions in core government services, most of which-police, fire, libraries, parks, and street and sidewalk maintenance-are delivered at the local level in California."</p>
<p>&nbsp;</p>
<p>While there are many causes of crowd-out such as structural problems found during economic downturns and increasing costs for employee benefits, unfunded pension liabilities have also play a major role. Eide notes that "between 2004 and 2012, growth in pension costs for California local governments outpaced spending on core services, such as police and fire, and quality-of-life services, such as parks and libraries." Inasmuch as governments try to protect their personnel, staffing for various departments continues to lag behind growth in the private sector. Additionally, it is difficult to maintain major capital investments and infrastructure when money is diverted to pay down hefty unfunded liabilities. Eide writes, "But local services are not improving at a rate proportionate to economic growth. When the next recession hits, more municipal bankruptcies will come. For the moment, the greatest threat is mediocrity, not insolvency."</p>
<p>&nbsp;</p>
<p>To read the full report and see recommendations for improving the situation, click <a href="http://click.email.reason.org/?qs=237a0cea2d36151824b10b846747a43ab51fd718f55098edae40459c55be890ef1f4b9f92c417678">here</a>.</p>
<p>&nbsp;</p>
<p>&nbsp;</p>
<p><strong>Reforming</strong><strong> Alabama's Retirement System<br /></strong><em><strong>By Truong Bui, Reason Foundation</strong></em></p>
<p>&nbsp;</p>
<p>A <a href="http://click.email.reason.org/?qs=237a0cea2d361518df092a7699034ecb5833e375e99482d5e279b3aed80cfb9aeb9061467915093a">recent report </a>by the Alabama Policy Institute examines the public retirement system in Alabama and recommends substantive reforms to bring about fiscal sustainability. As a whole, Alabama's pension system is unfunded by $15.2 billion, with a funded ratio of only 66 percent. This year alone, the state is expected to spend nearly $1 billion on pension contributions, which have increased annually by 11.9 percent on average since 2004. The pension cost accounts for 12 percent of the entire state budget (excluding federal funding), and is the second-largest outlay in all of state government, behind only education.</p>
<p>&nbsp;</p>
<p>Alabama attempted to bring down pension costs with two bills in 2011 and 2012, which raised the employee contribution rate and created a new tier for new employees with a more affordable benefit formula. These changes are estimated to save the state about $162 million annually on average over the next 30 years. The measures, however, still left some fundamental problems unaddressed. The report's recommendations aim at fixing these problems:</p>
<ul>
<li>Cash balance pension plan: a switch to a cash balance plan would provide more portability for employees through individual accounts, and reduce taxpayers' contingent liability by allowing mutual risk sharing between the public employer and the employees.&nbsp;</li>
<li>Judicial pension reform: the current benefit formula for judges is excessive and should be made more consistent with those of other state employees.&nbsp;</li>
<li>Eliminate piggyback agency participation: the definition of "teacher" for eligibility to participate in the state pension system is too broad, allowing a private lobbying group to benefit from taxpayers' money. Fixing the definition would narrow the pension benefits to the intended workers.&nbsp;</li>
</ul>
<p>To read the report, go <a href="http://click.email.reason.org/?qs=237a0cea2d36151849a8dc498d61247d75911c1f361072fff790915b58a6ca50094ff483fbe871d9">here</a>.&nbsp;</p>
<p>&nbsp;&nbsp;</p>
<p><strong>GASB</strong><strong> Changes Hit Public Pension Plans<br /></strong><em><strong>By Truong Bui, Reason Foundation</strong></em></p>
<p>&nbsp;</p>
<p>Public retirement systems in the US have experienced the first wave of change in the <a href="http://click.email.reason.org/?qs=237a0cea2d361518c3fd43a71b176902713d41f071a87f7fcc537f080d4bb1609e9a1e4f1c038616">Governmental Accounting Standards Board (GASB) rules </a>. Rolled out in 2014, GASB 67 requires a different treatment of the discount rate, making public plans use a market discount rate to value the pension liabilities that are not covered by projected performance. The resulting blended discount rate, for many plans, is often lower than previously assumed.</p>
<p>&nbsp;</p>
<p>According to a <a href="http://click.email.reason.org/?qs=237a0cea2d36151892a1a99e8a787bd3b2c9ce81b6e3618bccadb5d8b7a30c74638b8c105226570b">recent analysis</a> by <em>Governing </em>, 28 out of the 80 surveyed pension plans decreased their discount rates in fiscal year 2014. However, the average funded status rose from 70 percent in 2013 to 74 percent in 2014, thanks to the new accounting rule requiring plans to report the market value of assets, which have recently seen large gains, instead of the smoothed value. Some plans did see a significant drop in their funded status. For example, the Kentucky Teachers' Retirement System had its funded ratio fall by 6 percentage points in 2014 after reducing its discount rate by two points to 5.23 percent. Similarly, the funded status of New Jersey's state employee retirement plan sank to 28 percent from the previous 46 percent due to the plan's discount rate adjustment.&nbsp;</p>
<p>&nbsp;</p>
<p>The second wave of change will come later this year, with the new rule GASB 68 requiring cost-sharing employers to record their share of unfunded liability on their balance sheet. The rule is expected to force governments to recognize the role pension obligations play in their overall finances.&nbsp;</p>
<p>&nbsp;</p>
<p>Despite these positive changes, the new GASB standards still have <a href="http://click.email.reason.org/?qs=237a0cea2d361518a76fe9eda53bbaa14a808ce01b1f2c6b7b43541e189c24b2b785c57f5360a67b">serious limitations </a>, and only structural reforms would bring long-term sustainability to government pension systems.&nbsp;</p>
<p>&nbsp;</p>
<p>To read the <em>Governing </em>analysis, go <a href="http://click.email.reason.org/?qs=237a0cea2d3615185d5c48f41a2f04324b0aa9f9aa288b948eb58a3182850787de71f3fcc9d6c2f3">here</a>.</p>
<p>&nbsp;</p>
<p><strong>Why </strong><strong>Pre-fund? Why Fully Fund?<br /></strong><em><strong>By Lance Christensen, Reason Foundation</strong></em></p>
<p>&nbsp;</p>
<p>The Terry Group, actuaries and experts on pension plan funding, are developing a series of <a href="http://click.email.reason.org/?qs=237a0cea2d36151866c86f3d3b9108e0151bb8ddfc9a6a549d6c7a58c39750af4dad81ef4030dbb3">commentaries</a> to advance the discussion on retirement solvency. In their most recent column, <a href="http://click.email.reason.org/?qs=237a0cea2d361518ce973f59d66e3fdfb126d025ddd348e6005d0d4d245c97c0d18136949c23c78b">"Why Pre-fund? Why Fully Fund,?" </a>they address the challenges to pre-funding public pension plans and whether full funding will be a result. They ask the question, "Should immediate full funding of current liabilities be the 'norm?'"</p>
<p>&nbsp;</p>
<p>Putting the situation in a more relatable context for the average citizen, they set up a construct where "it may be useful to think of the pool of current taxpayers in a public entity as analogous to the current stockholders of a private sector entity. And future taxpayers-those who will ultimately have to pay the deferred funding cost-as analogous to the future investors of a private sector entity. Those future taxpayers (like future investors) may 'discount the value of the municipality,' e.g., through reduced property values, to reflect the deferred funding obligation."</p>
<p>&nbsp;</p>
<p>Working upon the assumptions that any and all pension promises will have to be made at some point in the future (except in the case of a default), that the costs of most pension plans continue to increase and many are oversubscribed, and that aggressive pre-funding in private sector plans is required by law, perhaps state and/or federal law should find a way to require fully funded systems so that all public pension plans can actually pay out benefits promised years in the past without crippling future generations of taxpayers. As it stands now, governmental accounting standards are just that, standards and guidelines, and it is largely up to pension boards to make the final funding decisions.</p>
<p>&nbsp;</p>
<p>Reason Foundation's director of economic research, Anthony Randazzo, has also explored the issue of full funding at some length <a href="http://click.email.reason.org/?qs=237a0cea2d36151820d2138f7376c903e49ded940dc8751d16af37604e1a02af57ff3503212e92fe">here</a>. He concluded that "there are various fiscal, political, and institutional factors at work, and no one-size-fits-all answer."&nbsp;</p>
<p>&nbsp;</p>
<p>To read The Terry Group's full analysis, go <a href="http://click.email.reason.org/?qs=237a0cea2d361518a3d4b5654504c4a2af4656ddf96c3575f847b0a2d086a2581220b8de0b379e2c">here</a>.</p>
<p>&nbsp;</p>
<p>&nbsp;</p>
<p><strong>Website</strong><strong> for Government Workers to Learn about 401(k)s<br /></strong><em><strong>By Truong Bui, Reason Foundation</strong></em></p>
<p>&nbsp;</p>
<p>At <a href="http://click.email.reason.org/?qs=237a0cea2d361518a7467fd7bb119c63306b45f8c063a270c29232387d00824d335a1a666a392be6">workerfreedom.com </a>, the Illinois Policy Institute provides an interactive tool for government workers to explore what 401(k)-style pension reform could mean to them. At the website, a government employee in Illinois can input his/her age, occupation, number of working years, and current salary to calculate the annual retirement benefit he or she would receive under the new 401(k) plan. The site demonstrates the viability of a 401(k) plan in delivering retirement security, compared to the heavily unfunded defined-benefit counterparts.&nbsp;</p>
<p>&nbsp;</p>
<p>The website also supplies key facts and arguments about 401(k) plans. One can find a video explaining the workings of a 401(k) plan and a dedicated section that debunks several major myths about defined contribution systems.</p>
<p>&nbsp;</p>
<p>To use the tool and access the website, go <a href="http://click.email.reason.org/?qs=237a0cea2d36151879259a8a3fc81bf9e792ae6569f702e4ad07a25c497aa53fcc8a74517ec1de0a">here</a>.&nbsp;</p>
<p>&nbsp;</p>
<p><strong>Updated</strong><strong> Pension Gimmicks List<br /></strong><em><strong>By Lance Christensen, Reason Foundation</strong></em></p>
<p>&nbsp;</p>
<p>State Budget Solutions put out its most recent list of tricks used to hide the true cost of public pensions. It builds upon their <a href="http://click.email.reason.org/?qs=237a0cea2d361518a85bca19ddef613ba6c3e5e195d604c4806deb5838b6d4d4369d8bea5db16022">list from 2013 </a>. Policymakers and key advisors use many of the tactics they identified to confuse or hide the unsound fiscal problems of government sponsored retirement systems reform. Indeed, while investment strategies and returns are often blamed for underfunded systems, other assumptions and models often have just as much (or more) bearing on whether a pension fund will be able to provide a secure retirement to all its employees for decades to come. Some of the examples include:</p>
<ul>
<li>Outdated Life Expectancy Assumptions</li>
<li>Inflated Discount Rates</li>
<li>Overly Aggressive Investment Assumptions</li>
<li>Underfunding Pension Contributions</li>
</ul>
<p>&nbsp;</p>
<p>Authors Joe Luppino-Esposito and Bob Williams write, "Those who control the levels of benefits are politicians who must worry about re-election. This is not a system that rewards future planning over present results. If politicians were divorced from the process and employees and retirees had control over their retirement, a good number of these gimmicks would not be necessary to have a sustainable system."</p>
<p>&nbsp;</p>
<p>Read the complete list <a href="http://click.email.reason.org/?qs=237a0cea2d361518fb0ff028690f9fdd82946c1cdc2049b3198d310f30ca39f42805c17b7ebf0a0a">here</a>.&nbsp;</p>
<p><strong> &nbsp; &nbsp; &nbsp; &nbsp;</strong></p>
<p><strong>Quotable</strong><strong> Quotes on Pension Reform</strong></p>
<p>&nbsp;</p>
<p>"We are fortunate that we are in this position to pay down this unfunded liability. Although our revenues have improved, we have kept our costs down, set aside reserves for a rainy day and for these opportunities to reduce our debt. The early payment will save the city hundreds of thousands of dollars - money that can be put back into the community."&nbsp;<br /><em>- <a href="http://click.email.reason.org/?qs=237a0cea2d3615180c3c6dbdb0679e6869b5af51b81b457844d1968537e54567d144c1b63aa4783a">Shelly Higginbotham, Mayor of Pismo Beach City</a></em></p>
<p>&nbsp;</p>
<p>"Before California builds a funding model to pay for [a retiree health care] benefit for decades to come, the Legislature should consider whether this benefit should continue to be a part of the state employee compensation package for new hires. If prospective employees do not value this benefit as much as it costs, the state and the new employee might be better off if the state offered future employees an alternative form of compensation."<br /><em>- <a href="http://click.email.reason.org/?qs=237a0cea2d361518ca5fa31eeec3e88e9a84508f0d01ba7c9db47ccf5b5bc6106f64800725c3019f">California Legislative Analyst's Office</a></em></p>
<p>&nbsp;</p>
<p>"Once they get into the next budget, next year, we realize the need for more pension funds is going to be in competition with a lot of other state services. That's why we wanted to get it sorted out now, and before this gets to a truly catastrophic level."<br /><em>- <a href="http://click.email.reason.org/?qs=237a0cea2d36151881348d42a8a2191025e3da27a18077916395039594790e63d0fc2d802c500457">Paul Guffey, president of Kentucky Public Retirees</a></em></p>
<p>&nbsp;</p>
<p>"The worst outcome for Illinois citizens would be a Supreme Court finding that all public workers in Illinois are entitled until death to the benefits in place the first day they started their jobs - and that no disaster, epidemic or other public finance catastrophe permits governments to divert pension funds to that emergency."<br />- <a href="http://click.email.reason.org/?qs=237a0cea2d361518be713d5060086704bf9620f947512df2bee5a01862d60f2bc9eaa32c971e49ea"><em>Chicago Tribune Editorial Board</em></a></p>
<p>&nbsp;</p>
<p>"People appreciate services: They want cops and firefighters, they want teachers and all that stuff. But if you're a politician in a budget crunch, the one way to not raise taxes is to just not pay your pension bill. In the states and cities where there's a big problem, it's not because they underestimated cost. They simply didn't pay the bill."&nbsp;<br /><em>- <a href="http://click.email.reason.org/?qs=237a0cea2d361518453f2495287a7aafba400589beca1f76dcc565438866fbea8d85269ee735119d">Monique Morrissey, researcher at Economic Policy Institute</a></em></p>
<p>&nbsp;<strong> &nbsp; &nbsp; &nbsp;&nbsp;</strong></p>
<p><strong>Pension</strong><strong> Reform Handbook</strong></p>
<p>&nbsp;</p>
<p>For those interested in the process and mechanics of pension reform, Lance Christensen and Adrian Moore published a <a href="http://click.email.reason.org/?qs=237a0cea2d361518f1c1ecb11d49a25723209feee9f885daf699e043d199b3aa2d12d2bb903fc2d3">comprehensive starter guide </a>for state and local reformers.&nbsp; This handbook aims to capture the experience of policymakers in those jurisdictions that have paved the way for substantive reform, and bring together the best practices that have emerged from their reform efforts, as well as the important lessons learned.&nbsp;</p>
<p>&nbsp;</p>
<p>To access the handbook, go <a href="http://click.email.reason.org/?qs=237a0cea2d361518c22253a28ffc43ecea0903e50ee825e8e8d06891a38a8db4dd7b10f18af4bc5c">here</a>.</p>
<p><strong> &nbsp; &nbsp; &nbsp;&nbsp;</strong>&nbsp;</p>
<p><strong>Contact </strong><strong>the Pension Reform Help Desk</strong></p>
<p>&nbsp;</p>
<p>Reason Foundation set up a Pension Reform Help Desk to provide information on Reason's work on pension reform and resources for those wishing to pursue pension reform in their states, counties, and cities. Feel free to contact the Reason Pension Reform Help Desk by e-mail at <a href="mailto:pensionhelpdesk&#64;reason.org?subject=Pension+Help+Desk">pensionhelpdesk&#64;reason.org</a>.</p>
<p>***</p>
<p>Follow the discussion on pensions and other governmental reforms at <a href="http://click.email.reason.org/?qs=237a0cea2d3615182558b8792174225278fa939c418f187d93140f726029c1b058b3938f702b70ba">Reason Foundation's website</a> or on Twitter <a href="http://click.email.reason.org/?qs=237a0cea2d361518ec3286bbf457be34f5a2576cd03b51aaf3f705a260a38f9a37fc9742147e9e55">&#64;ReasonReform </a>. As we continually strive to improve the publication, please feel free to send your questions, comments and suggestions to <a href="mailto:lance.christensen&#64;reason.org?subject=Newsletter">lance.christensen&#64;reason.org</a>.</p>
<p>&nbsp;</p>
<p><strong><em>Lance Christensen&nbsp;<br /></em></strong><strong><em>Director, Reason Pension Reform Project<br /></em></strong><strong><em>Editor</em></strong></p>1014228@http://www.reason.orgThu, 23 Apr 2015 13:45:00 EDTinfo@reason.org (Lance Christensen)California Crowd-Out http://www.reason.org/blog/show/california-crowd-out
<p>When pension costs increase, absent tax increases, significant changes to actuarial assumptions, prudent fiscal decisions or even substantive reform, other core governmental services are often negatively impacted through &ldquo;crowd-out.&rdquo; In a recent in-depth study, <a href="http://www.manhattan-institute.org/html/cr_98.htm#.VTFk9fnF-b1">&ldquo;California Crowd-Out: How Rising Retirement Benefit Costs Threaten Municipal Services,&rdquo;</a> Manhattan Institute senior fellow <a href="http://www.manhattan-institute.org/html/eide.htm">Stephen D. Eide</a> writes, &ldquo;Balanced budget requirements mandate that when costs grow more rapidly than revenues, something must give. All too often, this has meant reductions in core government services, most of which&mdash;police, fire, libraries, parks, and street and sidewalk maintenance&mdash;are delivered at the local level in California.&rdquo;</p>
<p>While there are many causes of crowd-out such as structural problems found during economic downturns and increasing costs for employee benefits, unfunded pension liabilities have also play a major role. Eide notes that &ldquo;between 2004 and 2012, growth in pension costs for California local governments outpaced spending on core services, such as police and fire, and quality-of-life services, such as parks and libraries.&rdquo; Inasmuch as governments try to protect their personnel, staffing for various departments continues to lag behind growth in the private sector. Additionally, it is difficult to maintain major capital investments and infrastructure when money is diverted to pay down hefty unfunded liabilities. Eide writes, &ldquo;But local services are not improving at a rate proportionate to economic growth. When the next recession hits, more municipal bankruptcies will come. For the moment, the greatest threat is mediocrity, not insolvency.&rdquo;</p>
<p>To read the full report and see recommendations for improving the situation, click <a href="http://www.manhattan-institute.org/html/cr_98.htm#.VTFk9fnF-b1">here</a>.</p>1014226@http://www.reason.orgTue, 21 Apr 2015 13:25:00 EDTinfo@reason.org (Lance Christensen)Reforming Alabamas Retirement Systemhttp://www.reason.org/blog/show/reforming-alabamas-retirement-syste
<p>A <a href="http://www.alabamapolicy.org/research/alabamas-public-pensions-building-a-stable-financial-foundation-for-the-years-ahead/">recent report</a> by the Alabama Policy Institute examines the public retirement system in Alabama and recommends substantive reforms to bring about fiscal sustainability. As a whole, Alabama&rsquo;s pension system is unfunded by $15.2 billion, with a funded ratio of only 66 percent. This year alone, the state is expected to spend nearly $1 billion on pension contributions, which have increased annually by 11.9 percent on average since 2004. The pension cost accounts for 12 percent of the entire state budget (excluding federal funding), and is the second-largest outlay in all of state government, behind only education.<br /> <br /> Alabama attempted to bring down pension costs with two bills in 2011 and 2012, which raised the employee contribution rate and created a new tier for new employees with a more affordable benefit formula. These changes are estimated to save the state about $162 million annually on average over the next 30 years. The measures, however, still left some fundamental problems unaddressed. The report&rsquo;s recommendations aim at fixing these problems:</p>
<ul>
<li>Cash balance pension plan: a switch to a cash balance plan would provide more portability for employees through individual accounts, and reduce taxpayers&rsquo; contingent liability by allowing mutual risk sharing between the public employer and the employees.</li>
<li>Judicial pension reform: the current benefit formula for judges is excessive and should be made more consistent with those of other state employees.</li>
<li>Eliminate piggyback agency participation: the definition of &ldquo;teacher&rdquo; for eligibility to participate in the state pension system is too broad, allowing a private lobbying group to benefit from taxpayers&rsquo; money. Fixing the definition would narrow the pension benefits to the intended workers.&nbsp;</li>
</ul>
<p>To read the report, go <a href="http://www.alabamapolicy.org/research/alabamas-public-pensions-building-a-stable-financial-foundation-for-the-years-ahead/">here</a>.</p>1014225@http://www.reason.orgTue, 21 Apr 2015 13:24:00 EDTtruong.bui@reason.org (Truong Bui)GASB Changes Hit Public Pension Planshttp://www.reason.org/blog/show/gasb-changes-hit-public-pension-pla
<p>Public retirement systems in the US have experienced the first wave of change in the Governmental Accounting Standards Board (GASB) rules. Rolled out in 2014, GASB 67 requires a different treatment of the discount rate, making public plans use a market discount rate to value the pension liabilities that are not covered by projected performance. The resulting blended discount rate, for many plans, is often lower than previously assumed.<br /> <br /> According to a <a href="http://www.governing.com/topics/mgmt/gov-gasb-pension-plans-may-look-worse-soon.html">recent analysis</a> by <em>Governing</em>, 28 out of the 80 surveyed pension plans decreased their discount rates in fiscal year 2014. However, the average funded status rose from 70 percent in 2013 to 74 percent in 2014, thanks to the new accounting rule requiring plans to report the market value of assets, which have recently seen large gains, instead of the smoothed value. Some plans did see a significant drop in their funded status. For example, the Kentucky Teachers&rsquo; Retirement System had its funded ratio fall by 6 percentage points in 2014 after reducing its discount rate by two points to 5.23 percent. Similarly, the funded status of New Jersey&rsquo;s state employee retirement plan sank to 28 percent from the previous 46 percent due to the plan&rsquo;s discount rate adjustment. <br /> <br /> The second wave of change will come later this year, with the new rule GASB 68 requiring cost-sharing employers to record their share of unfunded liability on their balance sheet. The rule is expected to force governments to recognize the role pension obligations play in their overall finances. <br /> <br /> Despite these positive changes, the new GASB standards still have <a href="http://www.statebudgetsolutions.org/publications/detail/gasbs-ineffective-public-pension-reporting-standards-set-to-take-effect">serious limitations</a>, and only structural reforms would bring long-term sustainability to government pension systems.</p>
<p>To read the <em>Governing</em> analysis, go <a href="http://www.governing.com/topics/mgmt/gov-gasb-pension-plans-may-look-worse-soon.html">here</a>.</p>1014224@http://www.reason.orgTue, 21 Apr 2015 13:23:00 EDTtruong.bui@reason.org (Truong Bui) Why Pre-fund? Why Fully Fund?http://www.reason.org/blog/show/why-pre-fund-why-fully-fund
<p>The Terry Group, actuaries and experts on pension plan funding, are developing a series of <a href="http://terrygroup.com/news-and-ideas">commentaries</a> to advance the discussion on retirement solvency. In their most recent column, <a href="http://terrygroup.com/news-and-ideas/why-pre-fund-why-fully-fund">&ldquo;Why Pre-fund? Why Fully Fund,?&rdquo;</a> they address the challenges to pre-funding public pension plans and whether full funding will be a result. They ask the question, &ldquo;Should immediate full funding of current liabilities be the &lsquo;norm?&rsquo;&rdquo;</p>
<p>Putting the situation in a more relatable context for the average citizen, they set up a construct where &ldquo;it may be useful to think of the pool of current taxpayers in a public entity as analogous to the current stockholders of a private sector entity. And future taxpayers&mdash;those who will ultimately have to pay the deferred funding cost&mdash;as analogous to the future investors of a private sector entity. Those future taxpayers (like future investors) may &lsquo;discount the value of the municipality,&rsquo; e.g., through reduced property values, to reflect the deferred funding obligation.&rdquo;</p>
<p>Working upon the assumptions that any and all pension promises will have to be made at some point in the future (except in the case of a default), that the costs of most pension plans continue to increase and many are oversubscribed, and that aggressive pre-funding in private sector plans is required by law, perhaps state and/or federal law should find a way to require fully funded systems so that all public pension plans can actually pay out benefits promised years in the past without crippling future generations of taxpayers. As it stands now, governmental accounting standards are just that, standards and guidelines, and it is largely up to pension boards to make the final funding decisions.</p>
<p>Reason Foundation&rsquo;s director of economic research, Anthony Randazzo, has also explored the issue of full funding at some length <a href="http://reason.org/blog/show/underfunded-pension-causes">here</a>. He concluded that &ldquo;there are various fiscal, political, and institutional factors at work, and no one-size-fits-all answer.&rdquo;</p>
<p>To read The Terry Group&rsquo;s full analysis, go <a href="http://terrygroup.com/news-and-ideas/why-pre-fund-why-fully-fund">here</a>.</p>1014223@http://www.reason.orgTue, 21 Apr 2015 13:21:00 EDTinfo@reason.org (Lance Christensen)Updated Pension Gimmicks Listhttp://www.reason.org/blog/show/updated-pension-gimmicks-list
<p>State Budget Solutions put out its most recent list of tricks used to hide the true cost of public pensions. It builds upon their <a href="http://www.statebudgetsolutions.org/publications/detail/the-worst-state-budget-gimmicks-of-2013">list from 2013</a>. Policymakers and key advisors use many of the tactics they identified to confuse or hide the unsound fiscal problems of government sponsored retirement systems reform. Indeed, while investment strategies and returns are often blamed for underfunded systems, other assumptions and models often have just as much (or more) bearing on whether a pension fund will be able to provide a secure retirement to all its employees for decades to come. Some of the examples include:</p>
<ul>
<li>Outdated Life Expectancy Assumptions</li>
<li>Inflated Discount Rates</li>
<li>Overly Aggressive Investment Assumptions</li>
<li>Underfunding Pension Contributions</li>
</ul>
<p>Authors Joe Luppino-Esposito and Bob Williams write, &ldquo;Those who control the levels of benefits are politicians who must worry about re-election. This is not a system that rewards future planning over present results. If politicians were divorced from the process and employees and retirees had control over their retirement, a good number of these gimmicks would not be necessary to have a sustainable system.&rdquo;</p>
<p>Read the complete list <a href="http://www.statebudgetsolutions.org/publications/detail/look-out-for-these-pension-gimmicks">here</a>.&nbsp;</p>1014222@http://www.reason.orgTue, 21 Apr 2015 13:18:00 EDTinfo@reason.org (Lance Christensen)Testimony on Assembly Bill 190 (Kirner) in Nevada Assembly Committee on Ways and Meanshttp://www.reason.org/news/show/testimony-ab190-ways-means
<p>The state of Nevada is considering a substantive change to its public sector pension system. AB190, a bill currently being considered in the state assembly, would introduce for new employees a hybrid pension plan while leaving current employees alone.</p>
<p>In consultation with The Terry Group, Reason developed a forecast for how the legislation would&nbsp;change Nevada's fiscal position, taxpayer risks, and member benefits. We presented our findings in a hearing on April 15, 2015 before the&nbsp;Nevada Assembly Committee on Ways and Means. This is a summary of our testimony.&nbsp;</p>
<p><strong>Overview</strong></p>
<p>Our&nbsp;actuarial model of NV PERS allows us to analyze the long-term effects of AB190, as well as to assess the implications of the recently proposed amendments. When considering the effects of a pension reform bill there are three elements to consider:&nbsp;&nbsp;</p>
<ol>
<li>The fiscal effects of the legislation</li>
<li>How the legislation affects taxpayer risks;</li>
<li>How benefits for new employees would compare to legacy employees</li>
</ol>
<p><strong>The Fiscal Effects&nbsp;</strong></p>
<p>The first consideration to consider&nbsp;are the fiscal effects of AB190. Our first figure shows a baseline model for NV PERS, combining both the Regular and Public Safety plans; this is what we project for the current system should nothing be changed for NV PERS AND should all actuarial assumptions be correct.</p>
<p><img src="/files/F1-Baseline UAL and EC.png" alt="baseline UAL" width="375" /></p>
<p>Given current assumptions, the unfunded liability (in the blue bars) is scheduled to be paid off by 2034. However, total employer cost&mdash;i.e. normal cost for funding benefits plus an amortization payment on the pension debt&mdash;for both Regular and Public Safety employee benefits is going to rise from the 23% of payroll in FY2014 towards 33% of payroll.</p>
<p>Over the past decade, NV PERS experiences has not always matched actuarial assumptions. The unfunded liability has continually grown. However, we take a best case scenario assumption that assumptions will be met and the unfunded liability will fall.</p>
<p>Even under this best case scenario, though, employer costs are set to continue to grow. Should investment returns underperform in the coming years, employer costs will be even higher.&nbsp;</p>
<p>AB190 addresses the challenge of growing employer costs. Our second figure shows the same data as before, but with two added lines. The blue bars continue to represent baseline projected unfunded liabilities. The green line across the top shows what unfunded liabilities would be under AB190 &mdash; it is essentially unchanged. The yellow line is again the growing employer costs under the baseline, and the juxtaposed orange line projected employer cost under AB190.</p>
<p><img src="/files/F2-Baseline v AB190, UAL and EC.png" alt="baseline v AB190" width="375" /></p>
<p>The primary fiscal effect of AB190 is to reduce the trend in growth of employer cost. By introducing a less expensive benefit (AB190 offers a smaller defined-benefit multiplier and a defined-contribution rate that cumulatively have a lower normal cost than current benefits), over time normal cost for NV PERS will fall. Combined with keeping the amortization schedule fixed, the result is that total employer costs will stabilize at around 27% of payroll for the next several decades. Combined normal cost during this period will fall from about 18% of payroll to near 10% of payroll.&nbsp;</p>
<p>We estimate that the savings as a result of AB190 would be substantial, as shown in the below table.</p>
<p><img id="en-media:image/png:6f01d42bd1c73341e68e24a8460aa749" src="/files/F2-Cost Savings.png" alt="cost savings table" width="400" height="197" data-en-overlay-id="3" /></p>
<p>In the first fiscal year that AB190's changes would be meaningful, FY2017, we anticipate employer cost will be $14 million less than currently projected. Over five years, we anticipate that a pension system as proposed in AB190 will cost taxpayers $216 million less than making no changes.&nbsp;And over 20 years, the employer cost savings from adopting AB190 will be around $2.4 billion.</p>
<p><strong>The Change to Taxpayer Risks</strong></p>
<p>The second consideration for AB190 is how the law reduces the&nbsp;risk&nbsp;that taxpayers are exposed to with a defined-benefit pension plan.</p>
<p>Defined-benefit pension financing is always going to have some associated risks.&nbsp;For example, the investment returns could be lower than anticipated, the discount rate could be inaccurate and cause under contribution, and/or&nbsp;people could simply live longer than the longevity assumptions.</p>
<p>A way of considering this is to look at what would happen to the baseline unfunded liability if investment returns underperform. Specifically, we show a scenario in the below figure where investment returns average 6% on an actuarial basis over the next 30 years, instead of the current assumed 8%. Again, this is what would happen to the baseline unfunded liability&mdash;i.e. to the the status quo&mdash;assuming no changes other than underperforming investment returns.</p>
<p><img id="en-media:image/png:863e944e7875395c2be4683d03c66fef" src="/files/F3-UAL Low Return Scenario Baseline.png" alt="NV PERS Low Return Scenario" width="375" height="234" data-en-overlay-id="2" /></p>
<p>Notice that if investment returns underperform on average over the next few decades that the unfunded liability will skyrocket instead of declining. And this isn't an abstract scenario&mdash;over the past decade the market returns of NV PERS have been just 6.91% (FY2004-2013) instead of the expected average 8%.</p>
<p>Now consider what would happen to the unfunded liability should investment returns have the same underperformance, but if AB190 were adopted. The next figure we show the same data as above, but with a line added for what unfunded liability would look like with a 6% actual return under a system reformed by AB190.&nbsp;</p>
<p><img id="en-media:image/png:97934d2cf37d3f01991d9254c16b055d" src="/files/F4-UAL Low Return Scenario AB190 v Baseline.png" alt="AB190 UAL Low return" width="375" height="232" data-en-overlay-id="1" /></p>
<p>Because a hybrid system puts part of retirement benefits into &ldquo;defined-contribution&rdquo; accounts, the hybrid approach reduces the risks to taxpayers relative to a pension plan that is 100% defined-benefit. Funding DC benefits means having fixed employer costs. And taxpayers are no longer exposed to the risk of underwhelming investment returns with DC accounts.&nbsp;</p>
<p>In the figure above, we can see that debt is still going to rise (from the purple line to the orange line). That is just what happens when assumed returns are higher than actuarially valued actual returns over the long run. However, since over time hybrid employees will replace the legacy employees, and this means total defined benefit liabilities will be declining as well.</p>
<p>With fewer defined benefit liabilities exposed to low investment returns, the trajectory of growth in unfunded liabilities under AB190 reform changes.</p>
<p>To put this in context, if investment returns are going to average 6% over the next 30 years, adopting AB190 would mean the difference between debt growing to $15 billion instead of growing to $25 billion. In short,&nbsp;AB190 helps to mitigate some of the financial risks of a DB pension plan.&nbsp;</p>
<p><strong>The Change to Benefits</strong></p>
<p>The third aspect of AB190 that we considered was how the new benefit structure of the hybrid compares to the benefits for current employees.&nbsp;The best way to consider the various kinds of employees as a whole is to look at how the benefits change in terms of the "replacement rate."&nbsp;The replacement rate is a measure of how much of a worker&rsquo;s current income gets replaced by the pension benefit.</p>
<p>In the below table, we show projected replacement rates for the current, baseline benefits; and then we show&nbsp;the replacement rate for the proposed hybrid benefits.</p>
<p><img src="/files/F4-Replacement Rate.png" alt="replacement rates" width="400" /></p>
<p>Assuming an employee hired at age 25, we find that at age 52 the replacement of rate of an employee&rsquo;s income&mdash;whether Regular or Public Safety&mdash;is roughly the same whether we keep the status quo or adopt AB190. By the time an employee reaches the federal retirement age, the replacement rate for the hybrid benefit is substantially better for both Regular and Public Safety.</p>
<p>The primary value of the status quo is that an employee hired at age 25 could retire after 30 years and have a better replacement rate than with the hybrid. In effect, some employees will have to work a few more years to get the same replacement rate with the hybrid relative to the status quo.&nbsp;</p>
<p>On the whole, though, we find that for full career employees, the replacement rate of the hybrid benefit is as good if not better than the legacy benefit.&nbsp;</p>
<p><strong>Summary</strong></p>
<p>Our actuarial model of NV PERS, and forecasting of how AB190 would change the baseline, yielded three key findings:</p>
<ol>
<li>AB190 will create savings for total employer cost, $14 million in year one and around $2.4 billion over 20 years;</li>
<li>AB190 will mitigate risks to taxpayers by replacing part of the defined-benefit liabilities with a fixed employer cost defined-contribution benefit; and</li>
<li>AB190 will provide comparable benefits to the status quo, assuming the DC accounts and DB plan earn the assumed 8% return.</li>
</ol>
<p>To be sure, if Nevada wanted to speed up the amortization schedule (as Segal proposed in its fiscal note attached to the original version of AB190), then taxpayers would wind up paying less on net in the long-run for pension debt. Just like paying off a mortgage faster than scheduled, increasing the amount paid now (roughly $700 million a year for the first four years) would mean the debt gets paid off much faster. However, the trade off is that near-term outlays would be larger than anticipated for the next few years. This is a policy decision that lawmakers need to consider, but for now, the amended version of AB190 directs the plan actuary to keep the amortization schedule the same, which allows for the cost savings of adopting a less expensive benefit plan to be realized.&nbsp;</p>
<p>A PDF of our presentation to the Nevada Assembly Committee on Ways and Means is provided below.</p>
<p>For any questions or media inquires, please contact Anthony Randazzo, director of economic research at Reason Foundation at anthony.randazzo&#64;reason.org.</p>1014221@http://www.reason.orgMon, 20 Apr 2015 11:05:00 EDTanthony.randazzo@reason.org (Anthony Randazzo)A Response to the Defense of Status Quo for Failing Pension Systemshttp://www.reason.org/blog/show/blog-a-response-to-the-defense-of-s
<p>Opponents of pension reform in Nevada seem unwilling to admit that the system is broken and that its significant unfunded liabilities will impair state and local governments&rsquo; ability to provide basic programs and essential services for citizens. Rather than engage in constructive dialogue about the appropriate reform steps to take, they would rather deflect discussion and hope for some economic miracle or tax increase that will put billions of dollars more into a system that is critically ill.&nbsp;Here are <a href="http://reason.org/news/show/a-response-to-the-defense-of-status">some responses</a>&nbsp;to a sampling of statements made by Teresa Ghilarducci, a national advocate of defined benefit pensions, in&nbsp;<a href="http://www.reviewjournal.com/opinion/nevada-pers-model-nation-don-t-change-it">a recent&nbsp;<em>Las Vegas Review-Journal</em>&nbsp;op-ed</a>.</p>
<p>&nbsp;</p>
<p>In the end, both the taxpayers and those who have served Nevada in local and state government jobs deserve to understand the full context of the debate before them so that they are better informed about the needs and pathways to pension reform. Reform proposals before the legislature keep the promises made to those already in the system without increasing the debt on future generations. Further, policymakers acknowledge that Nevada needs a retirement system that is transparent, affordable, sustainable and secure for a changing workforce and future generations.</p>
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<p>To read the full commentary, go <a href="http://reason.org/news/show/a-response-to-the-defense-of-status">here</a>.</p>1014218@http://www.reason.orgTue, 14 Apr 2015 02:17:00 EDTinfo@reason.org (Lance Christensen)